The current treasury secretary doesn't account for inflation. It also explains why the poverty rate has increased. The reserve has noted the slowing trends of income growth.
Bonddad starts by trashing the GOP's current economic numbers. Fewest economy in 40 years, lower job quality, and income stagnant over inflation. Where's the expansion coming from?
Debt. According to the federal flow of funds, debt has gone up from 7 trillion to 11 trillion between 01 and 05. That's mainly because of mortgage debt. Total household debt per GDP increased from 70% in 01 to 90% in 05. Debt increased at a compound annual growth rate of 11.55%--twice the growth rate of the preceding periods.
The right wing always complains about the media's reporting of the economy. But underneath the macro numbers are pathetic developments. Job growth is the weakest of the last 40 years. The jobs created are of lower quality. After inflation, wages for 80% of America had decreased during the expansion. And people have financed this on their credit cards. This is the CREDIT CARD expansion. And the bill will come due.
PROFESSOR BEALE: much of what I have to say will echo what he just said. People power is based on we the people translating into government that matches. A big piece of that is how we handle tax, monetary, fiscal policy. The primary goal should be to develop a broad-based economy that supports a decent standard of living. Reward work, not wealth. Provide a disaster safety net.
The US experienced that in the 90s when we did just that. It coincided with reduced income disparity. We had civil rights legislation. Economy prospers when opportunities are spread broadly. But we’ve traded those policies for red ink fiscal policies that reflect willful indifference for average Americans.
Tax cuts, deficits, debt and gimmickry.
The tax cuts have increased income disparity. The gap between rich and poor is growing. The top 10% are gaining--everyone else is losing. Median income has fallen. CEO pay has escalated marvelously, 571% increase in a decade. The workers have not done so well. Retirement creates a galactic gulf. Low income earners cannot accumulate enough. So poverty increases, and has especially in the last four years. The percentage of families in poverty has increased.
Tax cuts for the wealthy don't help. The middle 20% got 8.4% of the tax cuts. You can cut them lots of different ways. Citizens for tax justice shows that between 2003 and 2010, the top 1% will receive a 15% cut in their taxes. If you take all these cuts we've been passing into account, these tax cuts have to be paid for by tax increases or entitlement cuts.
The wealthy benefited from the cuts in investment income. The wealthiest 1% get 60% of capital income. So you’re shifting the burden from the wealthy to the middle class.
Total federal taxes paid on wages amounts to 23%. Total taxes on investment income: less than 10%. The rationale is always spurring growth, trickle-down and everyone benefits. But wage-earners, we know, are losing.
Wage stagnation, price inflation--can't bode well for ordinary Americans. It is in health particularly that we see the problem. One more thing on tax cuts. The estate tax repeal is another one that obviously benefits only the ultra-wealthy. Only 1.2 to 1.4% of estates that come into play are taxable. It’s only the very rich estates that end up paying it, but you wouldn't know that from listening to the rhetoric of thrifty family farmers.
DEFICITS: continuous large deficits cause long-term imbalances. Between tax cuts and war costs, we've pushed the surplus into the deficit. Current estimates for 2006 are 300 billion, but who knows where it will really go.
Publicly held federal debt reached $4.829 trillion. Intergovernmental borrowing is another 3.5 trillion. Foreigners own an awful lot of that. 50% is held by foreigners. A lot of hedge funds in the Caribbean. The debt ceiling is 8.965 trillion. The problem with the debt is the global imbalances it creates. As other economies grow, they attract capital, and we lose the main engine of our economy. The problem with debt financed tax cuts is that it creates inter-class and intergenerational transfers to the wealthy.
One of the reasons it's hard to talk about tax cuts is because it depends on whether you're adjusting for inflation. It makes statistics manipulable. And they're happy to manipulate statistics. Let's look at the tax cuts in 2006 that extended the tax credit for the very wealthy. The House looked at that, the investment cuts, and the Senate looked at the AMT, and they then looked at that and conferenced it without the threat of a filibuster that would arise from a reconciliation bill.
In searching for individual examples to hold up about the estate tax, they haven't been able to find one. All the gimmickry, no matter what type, all of those things lead to the YOYO economy--You're On Your Own. We've traded trying to bring everyone along for something closer to the gilded age with robber barons. That’s not the right direction.
LONDON YANK: slideshow!
"The USA must accept that a waning primacy is not consistent with an assertion of superiority."
Those other 5.7 billion people all like to live nice lives too. It's a globally competitive economy. I appreciate that the US has primacy, but that is shifting, and it will lose it very soon. Within the next 15 years, China’s economy will be bigger in terms of GDP. The growth in Asia is so rapid that that could be an underestimate. That's not very inspiring, because a lot of the growth in the last 5 years have been in sectors that don’t contribute to long-term growth. Housing, homeland security, and healthcare. None of those make you a stronger economy in the future or more competitive going forward.
In 2003 Buffet wrote an essay about Thriftville v. Squanderville. Squanderville ends up getting enslaved to thriftville. If you run up big deficits, you get foreign ownership of everything worthwhile. That's why Dubai is buying our ports, and China buying our oil companies. They don't want dollars, they want real assets. They want control of the means of production. Buffet said that there are things you can do. Promote savings. Those savings need to be invested in productive ways. Not in housing, or big cars, or healthcare that's the most expensive on the planet, but in things that increase wealth over time. Warren Buffet isn't investing in America any more, and if that happens, that's scary.
Competitive positioning: the US have 5% of global population, and 50% of global military spending. 25% of oil consumption. 22% of all the prisoners on the planet. More prisoners than any other country in the world. More than 80% of global borrowing. For every dollar saved in the world, the US is borrowing 80 cents. When theres so much opportunity in the world, why wouldnt they take their savings and invest it at home?
The dollar crisis: The rest of the world is fed up with financing the US. The world is losing confidence in the US model. The US brand is seen as negative.
Creditor nations are working together to bring the dollar down because they've given up on the US being a responsible participant in finding a solution. It's not likely that the US will like the result of this process.
We've exported free markets to the rest of the world, but that means the US has lost a lot of power. There's a lot of choice out there for movement of assets, and it's a lot faster. There is 2 1/2 trillion dollars in currency traded every day. In 1973, most debt was held by central banks, and it was easy for the central banks to get together to resolve it. But now it’s in hedge funds. More than half of global volume is driven by hedge funds, and if they act quickly, it will be beyond the control of regulators to intervene. Hong Kong and China have more decision makers running hedge funds than the US. If Asia decides it's not comfortable with the US, there’s nothing we can do.
The EU has worked out. It's working. I'm pleased to have an EU passport and be able to live in any one of 25 countries, and be protected by a court of human rights. China is tying up agreements with other countries, and its sales pitch is a lot better. They don’t care about human rights records, they just care about the resources. So US policies are driving a realignment of interests. They have a better sales pitch, given the US history of intervention in domestic politics and regime change.
I was in Dubai for four months last year. The rest of the world is developing. Doing things right. Dubai had 59,000 in 1960. 2 1/2 million today. Incredible services, civic administration. It's modern. I lost my COO to Dubai when he was offered a job there. He decided to make his future in Dubai. It’s time to become multilateral.
Go back to surpluses, fiscal conservatism and rational investment. It'll take a recession to do that, but bite the bullet and get it over with. America spends a ton on healthcare and education, but they get nothing for it. Brits and Canadians live longer and they pay less. America should learn something. I know this won't be easy, but it's something to work towards.
And adopt global standards. It’s frustrating to find parochial proprietary standards. It would be nice if the U.S accepted international standards in telecommunication and computing. You could sell to the rest of the world.
STIRLING NEWBERRY: Financial principal of 22nd century financial group.
The failure is simple: BORROW AND SQUANDER. Beginning in the late 1960s and culminating in 1973, Bretton Woods, buttressed by the IMF and World Bank, fell apart. The individual most responsible was Richard Nixon, who, in a misguided effort, proceeded to institute the Smithsonian agreement. It is the worst financial agreement that any country has negotiated, ever. Richard Nixon said it would save the global financial order. At the end of it, we had no fixed currency exchanges. It took 8 years to fix. It is no accident that wages stagnated at that time. In 1981, I was a supporter of Margaret Thatcher, a balanced budget hawk and a Republican.
But the end of the order is coming. Most of the people on the stage are from the era of Paul Volker. We are of the belief that the United States practices fiscal discipline and the Dollar becomes a gold standard. Clinton did this in the 90s. But there's a perpetual dollar shortage around the world. It creates problems in South Korea because they faced a currency crises. You could have bought Korea for less than the price of breaking it apart. Greenspan flooded the world with liquidity. But we refused to practice fiscal discipline by creating marginal taxes.
In 2000, we faced two wildly divergent views to deal with the fiscal crisis. I sent out a crash signal in April 2000, and sold every US equity I had on the 4th. I then sent a signal to buy Euro-based investments. Then, it was selling at 85 on the dollar. Now it's 125, and not looking back.
We have an energy deficit. To buy the energy we need, we run a trade deficit. The concentration of Eurodollars and Petrodollars grows. One response was to slash marginal tax rates on the wealthy. It told people to stop speculating on commodities and start trading stocks, and it created a huge bull market. But people are no longer investing in things like the highway system. The government lives longer than anyone else. This was pointed out by a conservative macroeconomist. The US has been able to sell bonds because we've been able to tell the rest of the world that someday we'll tighten our fiscal policy and they'd be caught short in dollars.
Chinese government funds production and takes the profits of that production and pulls them into the central government. If the profits sit in your government, they'll get into it somehow. In China, it’s easier to ship it overseas because companies can't show an increase in value. We no longer have the credible threat that we will have another high-tech boom. Korea has better broadband. Taiwan has better telecommunications. In the 1990s, if you invested in Germany, you would have gotten creamed, but the NASDAQ would have made you rich. As soon as that threat goes away, the equivalence hypothesis goes away. They don't need to buy our dollars or buy our debts. This is parallel to the situation in the 60s and 70s when the rest of the world realized that they could buy dollars and cycle through the gold market because it was better on the open market. And that's the rational thing to do if the fixed government price is lower than the free market price.
Our monetary base is based on the value of the houses, buildings and assets of this country. Not on gold, but on the market value of those hard assets. For 70 years it served us well because it encouraged value creation in the community. It was a way of creating a free market mechanism where distribution was controlled by individual economic decisions on a ground level.
But wealth isn't generated that way because we are no longer independent on our energy sources. The US needs to break the cycle of deficits by changing the way it deals with the rest of the world. The simple solution is to stop using 6% of the GDP to finance our trade deficit and get back to a situation where we sell as much as we import. We would have to shift 5% of our GDP from making mcmansions and excessive profits in the healthcare system--it'ss cheaper to borrow money to build a house than it is to borrow money to build a business. The simplest policy change is to shift this balance. Go to an export economy. Get fiscal discipline. Otherwise, WE WILL BE IMF'ed.
As Stiglitz says, what happens with a government is that they have to go to the IMF with a short term loan. What they do is say, we’re the IMF, and everybody pays us back. We will force you to slash your domestic spending, link your currency to an external hard currency, and shift the economy to export. It takes 1% of GDP cost to shift 1% of GDP to export. In order to shift 5% of our GDP, we have to use another 5% of our GDP to move it. If the U.S. doesn't begin making this shift, simply by using the economic tools we have available, and not involving ourselves into expeditions in Iraq. I knew Bush wouldn’t find WMD in Iraq, but he couldn't even find cheap oil there!
If we use the same rules imposed on the 1990 recession on the 2000 recession, it would technically have lasted until 2003, which would have been the worst recession post-war. If you don't, we have the worst recovery in post-war history. So take your poison.
We have the most vibrant financial sector in the world. We also have a huge resource base, a very well educated population, large trade contacts, and liquidity. What we need is investment supply--new businesses that can pay for the cost of money. We need to shift from the petroleum-based economy to an independent economy. This was FDR's focus. Hoover did the same thing. The communities that cannot get enough energy cannot grow. As long as we are beholden to foreign energy sources, we will continue to have Dubai.
Frank Lloyd Wright wanted to build a 2000-foot skyscraper. And to do it he wanted to do a tubular structure. And the architects have finally gotten a chance to try--but in Dubai, not in the U.S.
We either do this, or we will allow someone else to pull the plug for us. An expansion is over when the bankers say it's over.
Someone I correspond with writes for the financial times. When Japan, China, Taiwan, Singapore, etc no longer fear a financial crisis, they will no longer buy our funds. It is much better to call the credit company before they declare you insolvent and set up a payment plan than it is to do it afterwards and have them impose a payment plan.
I'm a free-trader. I'm a hard-core free-trader. The interstate commerce clause has been used to expand economic rights. But what world do we live in when the Caribbean free trade agreement doesn't liberalize the sugar market? Agricultural products are the only thing for which they have a real advantage. If we broke that, every bottle of coke in this country would be cheaper.
You can ask Brazil, Lithuania or Argentina what happens when your currency melts down. Thank you.
Q: lots of the problems we face are because large multinational corporations control our politicians. Can we do anything to make market forces create a shift to better energy?
A: The way we subsidize industry is hidden in the tax code. Those subsidies are really one thing that makes it hard to know what profits they're really making, or how energy policy would work if we didn't. The senate thought about getting rid of them, a little accounting gimmick, but the uproar and the success of those companies to make sure it didn’t happen was immediate. So it's very hard to change those gimmicks.
A: corporations aren't all evil. There's a lot of sensible allocation of capital. So not all corporations are bad. But it's balance. I was thinking about this a couple of weeks ago in terms of Martin Luther who led the reformation against the sale of indulgences. Poor people didn’t have that option. The way the American government seems to work is that the rich buy indulgences--earmarked legislation, incentives, forgiveness of their excesses. What we need to get back to is a more populist form of government.
A: STIRLING: How many people here remember the Florida election fiasco? 80% of shareholders have their votes dismissed by the way we structure mutual funds. The problem of corporate democracy is going to be perpetual. The people running it aren't the owners. If you go to the Electrical Institute of America, they'll tell you how much it takes to make each alternative energy balanced against standard PGGC and IGGC. Get a CO2 externalities tax and get the number high enough, paid against the carbon extraction industries, and transfer that to non-carbon technologies.
Q: US imports 2/3rds of the crude it consumes. Most of that is controlled not by companies but by governments. That applies just to electric power, but oil is imported for cars.I didn’t get the rest of the questions from this event.