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Three Economic Myths: Part 3

This is the final part of a 3 part series on economic myths.

Myth 3: The U.S. is sliding into "socialism"

 

From Personal Finance News from Yahoo! Finance

For a system allegedly being strangled in its bed, U.S. capitalism seems to be in astonishingly robust shape.

Numbers published by the Federal Reserve a few weeks ago show that corporate profit margins have just hit record levels. Indeed. Andrew Smithers, the well-regarded financial consultant and author of "Wall Street Revalued," calculates from the Fed's latest Flow of Funds report that corporate profit margins rocketed to 36% in the first quarter. Since records began in 1947 they have never been this high. The highest they got under Ronald Reagan was 30%.

The picture is also similar when you exclude financials.

The Dow Jones Industrial Average (^DJINews) is above 10,000. Small company stocks have rallied astonishingly since early last year: The Russell 2000 index is back to levels seen not long before Lehman imploded. Meanwhile Cap Gemini's latest Wealth Report notes that the North American rich saw an 18% jump in their wealth last year.

Meanwhile, federal spending, about 25% of the economy this year, is expected to fall to about 23% by 2013. In 1983, under Ronald Reagan, it hit 23.5%. In the early 1990s it was around 22%. Some socialism.

These days, three-fifths of the entire budget goes on just three things: Insurance for our old age (through Social Security and Medicare), defense, and debt interest.

Conservatives don't want to cut the $700 billion-plus we spend on defense. We can't cut debt interest payments. And while Social Security and Medicare certainly need reform, the main "problems" are simply rising life expectancy and health care demands. If we didn't provide for the insurance through our taxes we'd have to do it individually.

What about the rest of the budget? It's jumped from around 7% of GDP a few years ago to about 10% now. Out of control? It's been in the 6% to 9% range for decades. It's forecast to fall to about 8% again in a few years.

So much for a revolution. But here comes the counter-revolution just the same.

It's socialism because we have a Democrat in the office of the President. It's "trickle down" when we have a Republican in office. Let's see:

  • Corporate profits up – CHECK
  • Stock market up – CHECK
  • Non-discretionary spending unmovable – CHECK
  • Federal budget as a percentage of the economy hasn't changed much (if at all) – CHECK

Seems like nothing's wrong to me. Oh, sure, the federal government spends a lot of money – money it doesn't have – on some stuff we don't need. But try taking away social security, Medicare, or defense. You'll be out of a job real fast if you're a national politician. Nobody has the wherewithal to do anything about any of this stuff.

So this is what I'd tell the Obama administration, if they asked: GROW the damned economy. Get it to 5-8 percent, and all this debt/deficit talk vanishes, people get hired for good jobs, and Obama gets a second term. It really is the economy, stupid, and Obama should have cracked this nut a while ago.

If I've said it once, I've said it a thousand times: The stimulus package was way too small.

And now that both sides of the aisle have either forgotten or dug in their heels on unemployment compensation extensions and further stimulatory legislation, we may be in for a classic double-dip recession.

Only this time, it might drive what seemed to be inevitable and then highly unlikely – a corporate lending and business real estate catastrophe that could dwarf the mortgage meltdown.

Then more cries, this time maybe real, for socialism will come to the forefront. Our brand of market capitalism (highly influenced by the idiots who represent us in Congress) certainly isn't working right now.

Three Economic Myths: Part One

This is Part 1 of a 3 part series about economic myths. Parts 2 and 3 will follow, hopefully this week 🙂

Economic Myth 1: Unemployment is below 10%

From Personal Finance News from Yahoo! Finance

What nonsense that is. The official jobless rate, at 9.7%, is a fiction and should be treated as such. It doesn't even count lots of unemployed people. The so-called "underemployment" or U-6 rate is an improvement: For example it counts discouraged job seekers, and those forced to work part-time because they can't get a full-time job.

That rate right now is 16.6%, just below its recent high and twice the level it was a few years ago.

And even that may not tell the full story. Many people have simply dropped out of the labor force statistics.

Consider, for example, the situation among men of prime working age. An analysis of data at the U.S. Labor Department shows that there are 79 million men in America between the ages of 25 and 65. And nearly 18 million of them, or 22%, are out of work completely. (The rate in the 1950s was less than 10%.) And that doesn't even count those who are working part-time because they can't get full-time work. Add those to the mix and about one in four men of prime working age lacks a full-time job.

Dean Baker, economist at the Center for Economic and Policy Research in Washington, D.C., says the numbers may be even worse than that. His research suggests a growing number of men, especially in deprived, urban and minority neighborhoods, have vanished from the statistical rolls altogether.

The verbiage above tells the right story. The official unemployment rate has always been a poor gauge of the employment picture. Only now, it's worse. I'll try to find data to back it up, but my gut tells me there are a lot of people underemployed (not working full time but who need or want to).

By "underemployed," I also mean that people aren't getting paid what they need to survive. Perhaps you lost your cushy 9 to 5 six-figure banking job and now you're working as a retail store manager (big pay cut there). You're working longer and harder but getting paid significantly less than you had been.

That's underemployed. Yes, you have a job and good for you! But you've certainly had to make some lifestyle changes, wouldn't you say?

A lot of personal finance bloggers would tell you that you should always live the frugal life; that's a great opinion to have and if you walk your talk, you're good to go. However, many people cannot live the way you do.

They are married and are the sole providers of their families. Or they have kids or parents to care for. Obligations that they may have acquired at a younger, less financially-aware age.

No matter. For the average man or woman on the street, having a job that fits their basic lifestyle needs is hard to come by right now. And I don't really see any relief on the horizon.

I will say, though, that lots of times the turn in the business cycle is unseen until it happens right in front of your eyes. That is to say, often times nobody sees it coming. Leading indicators are only so good. As they say, "hindsight is 20-10."

Let me know your thoughts in the comments.

Next up: Deficits are bad

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