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Tuesday, November 22, 2005

Excessive Spending - Outsourcing Doesn't Hurt (?!) - 2nd Chapter

Rather than posting comments to comments, there are a few additional points I'd like to make regard today's earlier post.

There seems to be a tendency to view our economy as just a dynamic, free-wheeling, competitive marketplace where the weak competitors will be displaced by the strong. Well, yes... and no.

The marketplace doesn't exist in a vacuum. Certainly, there are always companies arising while others are disappearing. There are always new products replacing old products. Efficiency is rewarded; complacency is punished. This is a free market, after all.

Okay, and then there is the real world of currency manipulation, protected markets, government subsidized competition, child/slave labor, and a host of other "un-American" practices that directly impact U.S. manufacturing companies.

If you think Toyota became a powerhouse in the U.S. because they were a better company than U.S. competitors, then you don't understand how they sold their products here at cost (and avoided significant U.S. taxes) while enjoying a protected home market. You don't understand how China has grown its "competitive" manufacturing base by copying - outright pirating - U.S. intellectual property and then using that pirated capability to undermine U.S. competitors.

So, there is not a lot of sympathy for evil old General Motors now that it has fallen on hard time. Those "service economy" states sneer at the "wasteful" U.S. heavy industries. Okay, how about:

  • textile quotas and restrictions protecting southern states
  • sugar quotas and restrictions protecting Florida
  • lumber quotas and restrictions protecting western states
  • beef quotas and restrictions protecting central states
  • corn subsidies for the plains states to produce ethanol
Hey, any wine producers fighting internet sales and imported brands? Is wine producing an industry or a service??? Oh, agriculture is different... we can't be dependent on foreign countries for our food and grown raw materials. Why not, Brazil and Canada are more cost "efficient".

Oh, come on. What would U.S. universities say if the government suddenly awarded research or service grants to foreign universities on the basis of competitive cost bidding? Plenty of good Indian PhDs out there who can work at half the price. And how "cost efficient" are U.S. universities... those bastions of our intellectual wealth... when they require double-digit percentage tuition increases for decades? Oh, yeah, we can't import those services.

Right, so a geographic oligopoly gives our intellectual industry the right to lord it over our manufacturing sector.

This isn't a "free market". It is many different kinds of markets that play by many different kind of rules. And rules can be changed. It is part of "economic policy"... or lack of one.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)