Is Janet Yellen the Best Candidate for Vice Chair of the Fed?

San Francisco Federal Reserve Bank President Janet Yellin is Obama's nominee for Vice Chair of the Federal Reserve Bank.  Why this policy dove may be a perfect short term answer, and a long term disaster.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability.  Sounds simple.
It's anything but.
I.  Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring.  That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth.  As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression.  When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves.  Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards.  It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II.  Price Stability
Price stability is another way of saying low inflation.  Inflation is the amount prices go up every year.  Anyone who lived through the 1970s remembers that prices rose much faster than wages.  Every year our same dollars bought less and less. 
When inflation takes hold, it's hard to stop.  People want more money to afford what they could afford last year.  If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise.  A vicious circle ensues, where labor wants raises and businesses want higher prices.  What stops the circle?  A recession, when businesses lay off workers and can contain prices.  The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy.  But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove."  That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation.  You may think, that with unemployment rates hovering in the double-digits, this is just what we need.  Certainly, that political opinion would be currently popular.  But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession.  It was a necessary evil that prevented the country from likely sinking into a Depression.  But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase. 
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary.  Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable.  The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low.  The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation.  Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression.  One significant factor in its length is thought to be insufficient economic stimulus.  It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair.  Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.

The Economics of What Happened Last Year in Plain English

Most economic news is reported by someone with a vested interest in what you think.  I don't care what you think, but I do care that you get all the information you need to draw your own conclusions.
I.  2009 US Economy
Industrial output fell by 10%, after having fallen 3% in 2008.  Less demand for goods.  No surprise here.
Unemployment grew  from 7.2% in 2008 to 10% in 2009.  To get some historical perspective, in the last comparable recession, July, 1981 - November, 1982 (16 months), the average unemployment rate was 9.09%.  When President Reagan took office in January, 1981, the unemployment rate was 7.5%.  When the recession began in July of that year, it had fallen to 7.2%.  At the end of the recession in November, 1982, it was at 10.8%, and stayed over 10% for the next seven months.
Consumer Confidence fell nearly 30%, after having fallen 45% in the prior year.  Again, no surprise. 
Inflation averaged under 1/4 of 1% last year.  With less demand, both the price of commodities (like oil, lumber, etc.) and consumer goods fall.  Current inflation is virtually non-existent.
Inventories fell by 6.75%.  This contributed to our Gross Domestic Product, and many think this growth is artificial.  I do not share this point of view because the opposite (growth in inventories) is subtracted from GDP.  When you think of inventory building as wholesalers buying goods that sit on shelves (which does not contribute to growth), then depleting those inventories by selling them makes more sense as contributing to growth.
Orders for "big ticket" items fell by 20% from the previous year, but increased from  $160.1 billion in January to $167.9 billion in December.
Leading economic indicators, which include measurements that generally predict either growth or contraction in the future, fell 8% from the previous year, but increased from 98.9 in January to 106.4 in December.
You can see, with the exception of employment, that these important economic indicators all fell from the previous year, but are improving.  These are the data that economists generally consider when they say things like, "We're stabilizing, but are far from healthy."  As you can see, history shows that unemployment lags most other economic measurements after a recession, likely due to the reticence of employers to hire until they're sure than the economy is really on solid footing.
II.  Monetary Policy
You know that the Federal Reserve Bank has cut interest rates nearly to zero - .25% to be exact - in order to lower the cost of borrowing money for businesses.  Any who save money know that a six month Treasury Bill returns about the same, .25%. 
Many investors gauge whether the stock market is expensive by comparing the return on the 10 year Treasury Note with the expected earnings for the Standard and Poor 500 Index.  Right now, the yield on the T-Note is 3.66% and expected earnings for the S&P 500 are 4.5% of its current price - about a 20% premium. 
30 year Treasury bonds are paying 4.42%, good news for anyone who is buying a home because this is the rate mortgages are based upon.  Now, all you have to do is find a bank that's not too scared to make a loan.
III.  Sentiment
Investor sentiment is my favorite indicator because it is simple and more reliable than any other I review.  As Warren Buffet often says, "Be greedy when others are fearful, and fearful when others are greedy."
That's exactly how this measurement works.  When it's high, everybody wants to buy stock.  Bad sign.
When it's low, everybody is scared to death to buy stock.  It's cheap.  Good sign.
In 2007, the reading averaged 63.  In 2008, it was 28.  As you know, if you bought stock in 2009, you show quite a profit.  In 2009, it averaged 41, with a current reading of 58. 
The market is not the bargain it was in 2008, as we'll see below.
IV.  Valuation
This is a measurement of how much stocks cost.  To get some historical perspective, since 1926, the stock market as measured by the S&P 500 had an average cost of  $15.82 for every dollar it earned. 
Right now, it's at $18.29, up from $17.97 last year. 
Not cheap, but not expensive.  It depends on whether you think businesses will earn more money next year.  Standard & Poor's projects earnings of $58.71 for the S&P 500 in 2010, up from $50.70 (a 16% increase). 
So there you are.  Based on that information, your opinion is as good as anyone's.

Mid-November Economic Outlook

Some very smart women I know noted recently that some women financial columnists, not unlike some of their male counterparts, sway their commentary toward a political point of view.  In my opinion, that does justice to neither financial analysis, which one would hope would lead where the data follow, nor politics, which one would hope to be policy-driven.  Whatever our point of view, data show both parties have contributed to the deficits we currently have. 
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I.  Unemployment
The unemployment rate rose to 10.2% last month.  Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over." 
Although this was expected, it is not good news.  Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II.  Other Economic Indicators
Here, the outlook is inconsistent. 

• Housing is trending upward
• Manufacturing is improving
• Non-manufacturing sectors look questionable
• Car sales have slowed after the "cash for clunkers" program ended
• Discount and luxury retail sales are moving slightly upward
• Corporate profits are improving

III.  Conclusion
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater.  Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010.  As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late.  My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive.  It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome.  It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful." 
I've started hearing, "Get in before you miss the boat."  That always makes me want to jump ship.

Straight Talk About Debt

No issue is more politicized than deficit spending.  Blame abounds, but little insight is given into the components of our deficit, and what reasonable action must be taken.
For a history of US deficit spending, click here.  For an estimate of our current national debt, click here.

Facts

The stimulus package comprises approximately 10% of our current deficit. 
The majority of the deficit spending is comprised of:

1. Unfunded liabilities from tax cuts made by Jobs and Growth Tax Relief Reconciliation Act of 2003.  When enacted, the Congressional Budget Office estimated that the tax cuts would increase budget deficits by $340 billion by 2008.  That effect has been exacerbated by the just ended recession (see 3. below).
2. Unfunded liabilities from Medicare Drug Program.  When enacted, Medicare chief Mark B. McClellan said the drug package would cost $1.2 trillion between 2006 and 2015.
3. The opportunity cost in GDP lost because of the recent recession which began in 2008.  Generally, annualized GDP grows just under 3%.  For the 18 months ended June 30, 2009, annualized GDP contracted just under 2% - or 4.6% less than average.   From the last quarter in 2008 to the second quarter of 2009, our $12 trillion economy shrank an aggregate of nearly $400 billion - representing a huge loss of tax revenue, loss of employment, etc.,

No credible economist would argue that the stimulus package was unnecessary.  It was begun by necessity in the previous administration and continued into the current one.  It is not the source of our economic problems, and allegations to the contrary are clearly false.

Growth of health care costs is unsustainable.

Left unchecked, growth in health care costs, currently about 17% of our GDP, will bankrupt the US.  That is not overstated to create alarm.  It is a fact.
Those who take the position that we cannot afford to pass comprehensive health care reform are wrong. 
Health care costs are increasing 6.2% per year.  At that rate, in 25 years health care cost will be almost 30% of GDP.  In 50 years, it will be almost 50%. 
It's the biggest problem we have, and we must solve it in order to address deficit spending in any meaningful way. 
To counteract any effort to address this problem which may threaten their profits,

• $3.8 billion has been spent by the insurance and finance lobbyists and
• $3.69 billion, by health industry lobbyists,

according to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal.  No industries have contributed more, by the way.

Medicare first.

Only one group represents more clout than the two lobby groups discussed above.  Retired persons.  Grey panthers.  AARP.  Lots of boomers with time to spare, and raised during a time where the promise of Medicare (enacted in 1965) was sacred.  Prior to the aforementioned unfunded drug program in 2006,

• the number of Medicare recipients increased 2 times - from 20.4 million to 42.6 million 
• the economy grew 12 times - from $1 trillion to $12 trillion
• Medicare spending grew 47 times - from $7 billion to $339 billion

Big problem.  Anyone can see that costs are rising too fast.  So where should we start?

1. Increasing information technology for patients
2. Containing drug costs via use of generics
3. Limiting malpractice judgements (thereby limiting doctor's insurance premiums)
4. Opening group insurance rates to small business
5. Providing equal tax benefits to private insurance as employer-provided insurance
6. Lowering the deductible and raising the contribution limits on Health Savings Accounts

These policies would assure that the goal of cost containment would be foremost in the minds of legislators.  If we don't get this right, we go broke. 
It's as simple as that.

A Woman's World Economic View

I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.

It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.

We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.

Then we really saw the force of this nasty recession.

Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.

II. Our Place in the World Economy

From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.

In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.

We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.

Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.

III. Popular Misconception

There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.

Smart sellers don't bankrupt their main customers, and China is not stupid.

Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.

Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.

Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.

Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.

IV. Future Course

Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.

Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.

We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.

V. What We Do

What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.

Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.

Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.

What we do matters.

The Female Retirement Dilemma

Issues involved with planning for retirement are different for women than they are for men.  And understanding them can be the difference between comfort and poverty in our old age.

I.  By Saving the Same Percentage, We Retire with Less Than Half Than Men

Let's look at the result of both men and women putting aside 10% of their earnings for retirement.

First, women current earn, on average $.80 for every dollar men earn.  So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.

Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member.  Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%.  That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.

So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation. 

At 65, a man will need ten years of retirement income from savings of $258,000.  Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years. 

A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800.  Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.

No wonder twice as many women than men live in poverty.

II.  What To Do

First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year.  Considering that replacing all the functions provided would total approximately $30 thousand per year (Source:  http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.

Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk.  The two long term investments that provide the highest return are stocks and real estate.

In the last few years, we have witnessed the volatility both these investments have.  But, let's put this into perspective.  The stock market high was in August, 2007.  Just over two years later, the market is down about 30% from its high.  There are two considerations we must make:

• These are long term investments, intended for use in ten years or more.  In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction.  These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes.  Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies:  once, during the correction in the 1970's; and the other, from March to year end, 2008.
• Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
• Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows. 

Third, we've seen the outcome of abdicating responsibility for our financial lives with the likes of Madoff, Stanford, Enron, WorldCom and others.  There is no one who will take more of an interest in our financial health that ourselves.

It requires only that we gain the knowledge to take action and the willingness to provide for our future.

A September Snapshot

September 2009 looks much better than September 2008.
We've certainly heard everyone and her mother say we're climbing out of recession. Shall we take a look and see whether everyone is actually right?
For the purposes of comparison, we'll compare the data available thus far in 2009 with the full year of 2008.
I. Manufacturing
Industrial output has averaged 97.4 over the first seven months of this year, with July actually showing upward movement for the first time this year, probably due in large part to the "cash for clunkers" program. 2008 industrial output averaged 109.6, however, so we're still down over 11% year-over-year.
The percentage of manufacturing capacity we are using has averaged 69.4% this year through July. (Full capacity is generally thought to be 84%.) Last year's was 78.3%, so here again we're down over 11%. The good news, however, is that capacity utilization has been climbing upward for five straight months.
II. Gross Domestic Product
It is generally thought that an economy our size can grow at 2.8% per year at full employment without causing inflation. In 2007, the US economy grew at 2.5%. In 2008, our economy contracted by 1.8%. In the first two quarters of 2009, GDP was -6.4% and -1%, respectively. Most economists predict flat to 2% growth in the third quarter of this year.
III. Unemployment
Last July, we looked at historic unemployment data http://womensfinancialplanning.blogspot.com/2009/07/unemployment.html and saw that unemployment generally begins to improve about one year after a recession ends. 2008 unemployment levels averaged 5.76% and this year, 8.77%. We can conclude, based on these data, that unemployment will begin to improve in the third quarter of 2010.
2010, however, is a mid-term election year, and this issue has already begun to be politicized. For that reason, the current Congress may approve an additional stimulus package aimed at improving the unemployment outlook, and, in doing so, their re-election prospects. From a strictly economic perspective, this seemingly unnecessary expenditure, and additional deficit to be added to the burgeoning national debt, would seem to be a mistake.
But, I never underestimate the lengths to which our esteemed members of Congress will go to be re-elected, so I consider an additional stimulus to be a needless, but likely event.
IV. Consumer Confidence
As you have undoubtedly heard, 2/3 of US GDP is consumer spending. As you have undoubtedly experienced, consumers are somewhat less confident than they were before this recession. To validate your feelings, consumer confidence was 103.49 in 2007, 56.76 in 2008 and, thus far in 2009, is 39.89.
Before we assume that all is lost for any potential growth in GDP owing to our cautious consumers, please take a look at the often ignored export situation, discussed recently http://womensfinancialplanning.blogspot.com/2009/07/wuvl-shape-of-our-upcoming-recovery.html
Should the hypothesis that newly enriched emerging markets will spend their dough on our exports, we may have a growth engine that could replace our previous non-stop, debt-riddled spending spree with something more sustainable.
V. Inflation
From 1973 to 1995, inflation averaged 2.8%. Most economists believe that 2.5% inflation allows sustainable economic growth and full employment. In 2007, inflation averaged 2.87%. In 2007, inflation rose to 3.85%. This year, with falling energy prices due to lessening demand, as well as consumer entrenchment in nearly all categories, inflation is .33%.
This is undeniably good news, which, of course, I will turn into something scary. At no time in history has the government printed money to the extent it has now and NOT caused inflation. History tells us it is coming, but it's not here yet.
VI. Business Inventories
When businesses are humming along, inventories used to build up in anticipation of happy consumers. Those days are over, for two reasons. The first, and most obvious, is that consumers are scared. So scared, in fact, that they're SAVING money. Weird.
Second, businesses have gotten smart. They operate as close to a build on demand model as possible, i.e., they don't build your thingamabob until you order it.
That said, however, inventories have fallen by over 6% - after building up for six straight years. They are low, and falling. When demand does return, which I believe it will through exports, then inventory buildup will help boost economic growth.
VII. Conclusion
All these indicators are pointing positive. It's been so long since we've had good economic news, we hardly recognize it when it shows up, but there it is.
The worst is over. Let's hope we keep our heads on straight and stay the course without succumbing to political pressure that will cause us to make poor economic decisions.

WUVL - The Shape of Our Upcoming Recovery

W
NYU Economics Professor Dr. Nouriel Roubini, sometimes called "Dr. Doom" for his less than rosy economics predictions, says the US recovery from its current recession will be in the shape of a W. W's, for those who are sharpening up their penmanship skills in preparation for the oncoming Fall semester, go down, up, down, up. He says he thinks we'll have a "double dipper" recession. Did I mention he made his reputation as a gloomy guy? His current fear is that the weary consumer will fail come to the rescue after the effects of government spending start to pull us out of the recession, and back we'll fall. He, by the way, is a professor of economics at the Stern School of Business. Every adjective associated with this guy seems to be depressing, but I guess there's something to be said for consistency.
U
Others, less gloomy but none too optimistic, say that this recession will resemble a U. Down we'll fall, and stay at an elongated bottom, then, finally, we'll move up. This elongated bottom will be caused by extended unemployment and cautious spending. After an extended period where inventories are sold off, housing prices bottom, and liquidity is restored to the banking system, we will then turn the economic corner after the last optimist has thrown in her towel.
V
The V proponents are the rosy predictors, who say the economy has hit bottom and is due to bounce right back up again. Those who are out of work tend to disagree with these rosy predictions. The V's cheerily respond by saying that the beginning of such a recovery is "jobless," to which the jobless respond with expletives which have been deleted for purposes of keeping this discussion family-friendly.
L
Then, rivaling Dr. Roubini for the doomsday scenario, is the L shaped recovery. I don't actually understand how this is a recovery at all, as it illustrates falling, then moving sideways. I suppose that one could argue that the fact that it doesn't fall forever would account for some degree of positivity. The L's argue that we have a "new normal" that is slower growth, higher joblessness, a lengthy period of stagnant prices and other depressing economic predictions. L's are not fun at parties.
Numbers - Not Letters
I've chosen to describe the recovery without the use of an illustrative letter. My experience with economics presents a problem that causes me to avoid using neat lines to illustrate anything. Economics is messy.
GDP
One often overlooked fact in the current GDP projections is our international trading trends. From 1950 to 1980, Gross Domestic Product averaged almost 4%. From 1980 to now, it has been almost 3%.
Source: Bureau of Economic Analysis
Trade and the Weakening Dollar
Economist Jim Paulson of Wells Capital Management in Minneapolis points out that trade deficits, i.e., the excess of imports to exports, fueled by the US consumer since the 1980's has enriched emerging nations, who provided our voratious consumerism with relatively cheap imports during that period.
Now that we are cutting back and repaying our debt, demand from those newly rich emerging markets is likely to increase the amount we export, just as our demand decreases. Further, our "strong dollar policy" in the recent past made our exports more expensive to emerging markets. Now, our dollar's weakened position as we lower rates to fuel our economic recovery, will make our exports even cheaper for those newly rich markets.
Economist Edward Yardeni of Yardini Research agrees with Paulsen, noting that, as of May 2009, "US exports of goods and services had actually risen by $1.9 billion from the previous month. . . while US imports continued to slide."
Source: Barron's Magazine, July 20, 2009
So, conceding that the weary US consumer is unlikely to once again come to the rescue of the US economy, there is legitimate reason to see light at the end of the tunnel. The shape of things to come?
Perhaps not a WUVL, but an unexpected increase in a rarely followed sector of the economy - exports, from an unexpected consumer group - emerging countries. The sky may actually not be falling, and those who predict a "new normal" of GDP growth in the 1% - 2% range, may have overlooked a piece of economic data that could increase their predictions from 33% - 50%, and even better, silence the WUVL's and those who join them in using letters to describe economics.
Pardon me for sounding like a dinosaur, but economics is made up of numbers - not letters.

Health Care Legislation

In the current debate about health care, facts are few and opinions are many. Here are some facts that may help you form your own opinion.

What We're Spending Now

The US Department of Health and Human Services' Center for Disease Control, using data from the Organisation for Economic Co-operation and Development , notes spending on health goods and services plus health-care infrastructure as a percentage of Gross Domestic Product as follows:

1. United States - 15.3%
2. Switzerland - 11.3%
3. France - 11%
4. Germany - 10.6%
5. Belgium - 10.3%
6. Portugal - 10.2%
7. Austria - 10.1%
8. Canada - 10%
9. Netherlands & Denmark - 9.5%
10. Sweden - 9.2%

Source: http://www.cdc.gov/mmWR/preview/mmwrhtml/mm5813a5.htm

US health care costs have more than tripled in inflation-adjusted terms over the last 20 years to their current level of 15.3%.

What We'll Be Spending If We Do Nothing

Further, if current policies remain unchanged, that percentage will increase to 25% of GDP in 2025, and 49% in 2082.

http://www.cbo.gov/ftpdocs/89xx/doc8948/01-31-HealthTestimony.pdf

Long Live the Rich, and the Poor Die Young

Yet, according to the NY Times, government research shows “large and growing” differences between the lifespan of Americans, based on their wealth. Admitting researchers in disagreement for reasons for this growing disparity, they do agree that a part of the explanation lies in whether an individual has health insurance.

Source: http://www.nytimes.com/2008/03/23/us/23health.html?_r=1

Expand Access and Curb Costs - One Out of Two

The Administration 's main objectives stated earlier this year were:

1. Expand access to health insurance, and
2. Curb runaway costs for the economy has a whole.

Current House legislation being considered, however, "significantly expands the federal responsibility for health-care costs," says Douglas Elmendorf, director of the Congressional Budget Office. The Senate Finance Committe has not yet released their verion of the bill. As both versions of health care legislation advance, expanding coverage has been embraced while few compromises have been made with pharmaceutical companies where savings were to have been made.

Allegations that the CBO has not "credited" such proposals as "preventative care measures" have been asserted. Those assertions are correct. It is apparent that preventative care will result in lower long term health costs. It is inappropriate, however, to assign a dollar amount to that cost savings, as that amount would be impossible to quantify.

One more quantifiable compromise would be to reduce the federal tax subsidy that encourages employers to offer large health-insurance policies, but that proposal has been opposed by labor unions (that have these tax-advantaged plans).

Where We Are Now

Current legislation has not yet achieved the goal of cutting costs in a way that will prevent unsustainable increases in health spending. Special interests on one side - particularly labor unions - are at odds with

• AMA (that wants increases in Medicare payments to doctors)
• Insurance companies (that want to prevent a government-run competitor in the marketplace)

Whatever your opinion, it is time to contact your Congressional representatives. Achieving both access and cost containment is critically important in solving this problem. The link below is provided for your convenience in doing so.

http://www.visi.com/juan/congress/

A Look at the Deficit and the National Debt

If you ask the average person the difference between the deficit and the national debt, you're likely to get a blank stare. While you are much smarter than the average Josephine, we'll go over that anyway, just in case you were asleep during that session of your Econ class.

The Deficit

The deficit is the amount of money we're spending THIS YEAR that exceeds the amount we brought in. The national debt is the sum total of all the deficits we've had. From 1749, we've had a total of about $6.3 trillion dollars in deficit spending. When you add interest paid on borrowing to pay that debt, it climbs to about $9.5 trillion. Since 1900, we've had 31 years where our income exceeded our expenses The other 79 years have had deficit spending. This year, the projected deficit is $407 billion. Last year, it was $410 billion.

For those who are politicizing current spending, here's a little perspective

• 1999 - $125 billion surplus (Clinton)


• 2000 - $236 billion surplus (Clinton)


• 2001 - $128 billion surplus (Bush)


• 2002 - $157 billion deficit (Bush)


• 2003 - $377 billion deficit (Bush)


• 2004 - $412 billion deficit (Bush)


• 2005 - $318 billion deficit (Bush)


• 2006 - $248 billion deficit (Bush)


• 2007 - $162 billion deficit (Bush)


• 2008 - $410 billion deficit (Bush)


• 2009 - $407 billion deficit - projected (Obama)

While it is admittedly very large, the deficit this year is currently projected to be less than the deficit last year.

So, now we're hearing many pundits, talking heads and others screaming about the size of the deficit. Some of those people are saying that we simply cannot afford to spend money on programs such as the stimulus, health care reform, etc. because of the size of the deficit. Without commenting one way or the other, one wonders where those were voices last year, when the deficit was $3 billion larger.

The National Debt

Our national debt is fast approaching $10 trillion dollars. For those not familiar with very big numbers, that's ten thousand billion. It looks like this - $10,000,000,000,000. No doubt about it. That's one big number.

Again, as a matter of perspective, here is the cumulative amount of the national debt for the last decade.

• 1999 - $5.605 billion (Clinton)


• 2000 - $5.628 billion (Clinton)


• 2001 - $5.769 billion (Bush)


• 2002 - $6.198 billion (Bush)


• 2003 - $6.760 billion (Bush)


• 2004 - $7.354 billion (Bush)


• 2005 - $7.905 billion (Bush)


• 2006 - $8.451 billion (Bush)


• 2007 - $8.950 billion (Bush)


• 2008 - $9.654 billion (Bush)


• 2009 - 10.413 billion (projected) (Obama)

Source: http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf

The national debt is projected to rise by 7.8% this year. That is the same percentage it rose between 2007 and 2008. Again, without commenting one way or the other, where was the outrage last year? Why is the 7.8% rise this year so much worse than the 7.8% rise last year?

How Much Do I Owe?

Those who express outrage regarding the national debt sometimes express the debt in terms of the amount that is owed by every man, woman and child in the US. Currently, that amount is nearly $34 thousand. Again, to gain some perspective, let's look at a couple of facts.

In 1960, the national debt was $290 billion and the population was 179.3 million. Every American owed about $1620 - $5432 in today's dollars.

In 1970, the national debt was $380.9 billion and the population was 203.3 million. Every American owed $1873 - $4908 in today's dollars (less than the prior decade).

In 1980, the national debt was $909 billion and the population was 248.7 million. Every American owed $3665 - $7479 in today's dollars.

In 1990, the national debt was $3.206 billion and the population was 248.7 million. Every American owed $12,879 - $20,589 in today's dollars. Big jump.

In 2000, the national debt was $5.629 billion and the population was 281.4 million. Every American owed $20,002 - $24,980 in today's dollars.

In 2009, the national debt is projected to be $10.413 billion and the population is 306.9 million. Every American owes about $34,000. Big jump again, but not as big as it was from the '80s to the '90s.

Population information was obtained from http://www.census.gov/popest/archives/1990s/popclockest.txt

Debt as a Percentage of Gross Domestic Product

Realistically, the national debt will never actually be paid to zero. We've had debt since 1900. The way to evaluate debt is as a percentage of GDP.

• 1970 - 8.9%
• 1980 - 15.6%
• 1990 - 40%
• 2000 - 50.7%
• 2009 - 73%

That is what is making people nervous. Let's put this in terms we can all relate to. Say that you have a mortgage that is $3500 per month, and your after-tax income is $4795 per month. After paying your mortgage, you will have about $1300 for everything you need. You're spending 73% of your income on your debt. Scary.

We can all agree that we're in a lot of debt. But let's not pretend that it happened this year. This problem has been mounting for a long time, exacerbated in the 1980's and in the current decade.

As always, I welcome your comments and suggestions.

Unemployment

The latest "doom and gloom" prediction is centered around the unemployment rate.

Misery Index

The Misery Index consists of adding the unemployment rate to the rate of inflation, or the percentage of those out of work plus the percetage by which prices are rising.

Historically, the misery index has been

• Truman Administration (1948 - 1952) Average 7.88 (High 13.63, Low 3.45)


• Eisenhower Administration (1953 - 1960) Average 6.26 (High 10.98, Low 2.97)


• Kennedy Administration (1961 - 1962) Average 7.14 (High 8.38, Low 6.40)


• Johnson Administration (1963 -1968) Average 6.77 (High 8.19, Low 5.70)


• Nixon Administration (1969 - 1973) Average 10.57 (High 13.61, Low 7.80)


• Ford Administration (1974 - 1976) Average 14.93 (High 19.90, Low 12.66)


• Carter Administration (1977 - 1980) Average 20.27 (High 21.98, Low 12.60)


• Reagan Administration (1981 - 1988) Average 11.19 (High 19.33, Low 7.70)


• Bush I Administration (1989 - 1992) Average 9.68 (High 12.47, Low 9.64)


• Clinton Administration (1993 - 2000) Average 8.80 (High 10.56, Low 5.74)


• Bush II Administration (2001 - 2008) Average 8.10 (High 11.47, Low 5.71)

The time weighted average Misery Index since 1948 is 9.64. The current Misery Index is 9.8: Unemployment is 9.5, and Inflation is .3. To put this into perspective, we are now 1.6% higher than the average since 1948.

Unemployment Rate

Some economic theorists have used the unemployment rate to justify their opinion that

• The stimulus package isn't working
• There should be another stimulus package, i.e., the stimulus package wasn't sufficient

Let's take a look at that hypothesis.

Of the $787 billion dollar stimulus package, approximately $75 billion, or about 10%, has been paid out. The Obama administration estimates that the stimulus package will have helped create (or save) 500,000 jobs in the two hundred day period from signing the bill February 17 to early August. 10% of the stimulus package will therefore have improved the number jobs lost by 20%. In other words, without the stimulus package, the jobs lost in the two hundred days since the stimulus package was in effect would have been 2.5 million instead of 2 million.

The Obama administration believes the government will ultimately meet its spending targets, increasing spending toward the end of the year as states fund their projects. Ultimately, the measurement of success is whether the economy improves, and, as shown below, it may be too early to make that judgment.

To use consistent time measurements, since 1948 there have been eleven recessions. Let's look at each, and the accompanying rate of unemployment.

Nov. 1948 - October, 1949 (11 months) - Average unemployment rate 10.69%

July 1953 - May, 1954 (10 months) - Average unemployment rate 4.43%

Aug., 1957 - April, 1958 (8 months) - Average unemployment rate 5.69%

April, 1960 - Feb., 1961 (10 months) - Average unemployment rate 5.94%

Dec. 1969 - Nov.,1970 (11 months) - Average unemployment rate 4.88%

Nov. 1973 - Mar. 1975 (16 months) - Average unemployment rate 6.09%

Jan. 1980 - July 1980 (6 months) - Average unemployment rate 7.07%

Jul.,1981 - Nov. 1982 (16 months) - Average unemployment rate 9.09%

Jul, 1990 - Mar. 1991 (8 months) - Average unemployment rate 6.225%

Mar. 2001 - Nov. 2001 (8 months) - Average unemployment rate 4.813%

Dec. 2007 - Jun. 2009 (18 months) Average unemployment rate 6.76%

(Note: Data are not available for July. Most economists opine that the the third quarter 2009 will be flat, and fourth quarter will show a slight increase in GDP)

For comparison purposes, the two most severe recessions in the period under review were Nov. 1973 - Mar. 1975 and the current one. The last five months of those recessions averaged an unemployment rate of 7.72 and 8.88, respectively. The last five months of this recession was 15% worse than the 1973 - 1975 recession.

Further, the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over.

Our current numbers are well within historical precedents, and to assert that the stimulus program is ineffective at this point is not supported by data, obtained from the U.S. Bureau of Labor Statistics.

In our next discussion, we'll talk about the deficit to see whether the alarm expressed by some over its size is warranted.