Letters to the Editor

 

Two rather lengthy exchanges with John, in Great State of California…

Part 1 from John… 

In reference to (commentary in the 5th Issue, Volume 2003 of the Newsletter) I am still concerned with regard to unemployment.  Also, your model of 5% growth for 10 years (noted also in the 5th Issue, Volume 2003) is unsustainable.  A 3% average would seem more realistic.

 

 

Unemployment is a concern for us as well - it's an ongoing issue that we will continue to monitor.

 

 

 

 

We take your point regarding the 5% growth issue, but my question is, why not 5%?  What causes you to think that it is unsustainable?  We threw the number out there and while at first blush it appears rather high, we suspect that so long as we keep taxes low, we should be closer to 5% than to 3%.  Not really a point of argument…perhaps just a point of departure.  The real GDP growth rate has averaged in the 3.5% range for the last three decades, but for tax (receipt) purposes we still use nominal GDP, which includes an inflation premium of about 1-2% (currently)...that would get us up in the 5% range.

 

On a further note, there is much more to the unemployment statistics than meets the eye.  If you've ever been involved with silly finance exercises at year-end (with moving accruals, tying numbers into year-end, etc.), you'd know how squirrelly year-end numbers get.  In addition, the Department of Labor made some big changes mid year. 

 

 

 

Part Two from John…

I agree that the economy has grown.  However, this is apparently dissimilar to other recoveries in that hiring seems to be recovering more slowly.  Moreover, many employers are transferring jobs off shore.  This is +/- since it keeps down prices but it can create areas of depression in regions that previously flourished.  I believe Michigan has seen some of this because of changes in automobile manufacturing.  However, it is also happening in computer software design with a vengeance.

I watched a bit of the post, State of the Union discussion.  A number of people interviewed were very skeptical regarding the recovery.  Here, we are still on the bubble but the restaurants look like they have increasing clientele.  We will see.

From your chart (sent as a previous attachment and included above), there are not many periods where the growth rate can be sustained at this pace.

 

 

John,

You hit the nail on the head.  In the past, at this point in a recovery, employers hired like crazy, driving up labor costs, etc. (often precluding significant sustained GDP growth), but the structural nature of the change has inhibited significant re-hiring and has forced companies to continue to press the productivity frontiers.  This has much to do with prices remaining sticky (or even falling) and has forced corporations to continue cost-cutting measures to remain competitive and eke out profits (much of the cost cutting has translated into lower prices at the consumer end - again competition).

 

There are positives and negatives to the entire scenario, but since all people are consumers, the positive effect of keeping the lid on prices is that most everyone shares in the net gain in purchasing power (consumer surplus).  This is not the case in the presence of inflation: there are winners who can pass price increases on to consumers.  This was the case with the auto industry many moons ago (no longer the case, obviously).  It appears that Volkswagen has been attempting to refrain from any pricing strategies (rebates)...the net result being that they experienced something on the order of 10% loss in market share this past year.

 

We tend to agree that real GDP growth will not continue in the 8% category (as was seen in the 3rd Quarter 2003…and now at 4.0 for the 4th Quarter - preliminary), but there is no reason why we won't see it above 4.5, and perhaps even 5% in the years to come.

 

The thing on the job front is that the high wage manufacturing jobs will continue to erode so long as those manufacturers operate in a competitive environment. 

 

Alan Greenspan, Chairman of the Federal Reserve Board, in a speech on January 26, 2004 to the HM Treasury Enterprise Conference, London, England:

 

“Flexibility in labor policies, for example, appears in some contexts to be the antithesis of job security.  Yet, in our roles as consumers, we seem to insist on the low product prices and high quality that are the most prominent features of our current frenetic economic structure.  If a producer can offer quality at a lower price than the competition, retailers are pressed to respond because the consumer will otherwise choose a shopkeeper who does.”

 

 

The following is a graph of the (manufacturing) job situation in Michigan.  Lesson: the consumer is loath to pay premiums for goods produced by higher priced union labor. 

 

 

 

Granted, the depreciating dollar will help all sectors, and the productivity gains will also help on the export fronts.  Increased demand will reduce unemployment, but the structural nature of it (the unemployment) will force those employees to be redeployed in other segments of the economy.

 

This is certainly not the first time that economic realities in the demand for labor has forced people to make hard decisions concerning relocation and lifestyle changes.

 

Another thing to note is that many of the jobs that have moved offshore make a great deal of sense in terms of the bottom line and on good note, it has freed up many people to re-create themselves and find more "creative" and fulfilling endeavors.  There are many in this category, and, while it is less than pleasant, the reality is that there is hope and most will be the better for it in the end.  On a further note, the abundance of IT jobs (for example) that were created in the 90s were temporary, awaiting only the build up in infrastructure in places with lower wages like India, China, etc.

 

We do see things continuing to improve and the job situation will certainly do so as well.  Employers are making rational decisions in rehiring, recognizing the immediate impact to the bottom-line and are scrutinizing as never before.

 

Like yourself, we remain guardedly optimistic, but it certainly hasn't been easy.

 

 

From Chris, also in California …

My fiancee and I were planning a honeymoon in Europe, but have concerns over the value of the Dollar vs. the Euro.  What do you see happening in the foreign exchange markets in the upcoming months?  On a less self-serving note, since commodity prices are determined by the world (in aggregate), then doesn’t it follow that prices will rise in the U.S. as the dollar depreciates?

 

 

Great questions Chris…

 

In response to your first question: 

 

 

 

 

I guess the graph speaks for itself.  It’s unlikely that the dollar will rise in value in the ensuing months.  Buy early and look for a good deal (the latest exchange rate – February 2, 2004, the exchange rate was at 0.80 euros per dollar).

 

Concerning the second part of your question…

Prices in commodities will certainly rise in the U.S. as the dollar depreciates (witness the 4.0% increase in PPI (finished goods) for year in 2003).  Having said that, it appears that the increase in prices would also manifest themselves in terms of imported goods.  This clearly has not been the case…  In addition, it should be noted that as prices rise for oil (for example), then more U.S. producers become involved.  This is the case in nearly all segments of the economy concerning commodities (raw goods in particular).  After rising significantly as the dollar showed signs of depreciating, gold, once well into the $420+ range, it has dropped to under $400 an ounce.  As further evidence, the price of U.S. imports rose only 1.9% in total for 2003 (Department of Labor / Bureau of Labor Statistics: U.S. Import and Export Price Indexes December 2003 – Released January 14, 2004), with nearly half of the increase in Petroleum Imports.  

 

Thanks for the question(s) and enjoy your honeymoon!

 

From Tom in Lansing, Michigan…

Dear Doctor Byrne,

I had the distinct pleasure of attending your speaking engagement in Novi, Michigan, January 22, 2004.  I found your speech extremely enlightening – grow out of deficits, not tax your way out.  From what I could gauge from the audience, I was not the only one who found your presentation intriguing.  Would it be possible to get another copy of your speech (the outline you passed out)?  By the way, I suspect that quite a few people (readers) would be interested in having a copy as well. 

 

Tom,

You can download the speech from the following link…Vol 2004-1 tax talk January 22, 2004.htm

Excerpt…

Bush Tax Cuts as Viewed Through the Lens of the New Economic Paradigm

 

I would like to begin with some history.  When FDR was campaigning against Herbert Hoover, he argued more vigorously for tax increases than did Hoover.  For what purpose was he proposing these tax increases?  To lower the deficit in the Federal budget brought on by the beginning of the Great Depression. Of course, once elected, Roosevelt ignored those election arguments…in the great American tradition where a politician will often say anything to be elected.

Text Box: From the Cato Institute – March 24, 2003
By Veronique de Rugy

On the campaign trail in 1932, Roosevelt noted: "For over two years our federal government has experienced unprecedented deficits, in spite of increased taxes." Yet, much like Gov. Davis today, Roosevelt decided to increase taxes more. He found out that a tripling of tax revenues did not balance the budget because the deficit soared from $2.2 billion in 1932 to $2.9 billion in 1940.  

…by the way, since this was published, Davis has been terminated by the current Governator of the great state of Kalifornia.



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