China’s manufacturing sector has experienced a drop for the first time in three years, largely because of lower export demand from both Europe and the US.

This has prompted a monetary stimulus policy in China, and–at the same time–many banks internationally are providing stimulus as well, propping-up stock markets everywhere.

The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilize global markets in the 2008 financial crisis after the collapse of Lehman Brothers.

In Italy, now the focal point of the euro debt crisis, the Treasury started emergency cash tenders for banks which have been squeezed particularly hard as Rome’s borrowing costs have soared towards 8 percent, a level seen as unaffordable in the long term.

The euro and European shares surged on the central bank action, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help.

These actions will lower the cost of borrowing, and that will be welcome both by deficit spending governments and industry, but for long-term help, there must also be a willingness to borrow and spend.

There may be a factor here that is not being given enough attention. We are in a world where we have experienced a great deal of new investment and consumer spending on personal computers, mobile phones, and the growth of new industries spawned by those technologies. It is natural that at the tail-end of those developments we will witness less investment spending and a slow-down in consumption.

US unemployment suprisingly higher

Today, American business pages are full of reports about the shrinking jobs market in the US. Just when many economists were expecting positive news about employment, unemployment rates have grown back to 9.2%, and that is not including underemployment and the large numbers of people who have dropped out of the workforce.

While you might think the concern should be for the unemployed, the focus of most articles is the negative effect on growth, and the problems it presents for Obama’s re-election.

Economists were stunned. They had been expecting job growth to strengthen in June as oil prices eased and supply disruptions caused by the Japanese tsunami and earthquake receded. Instead, the government’s monthly snapshot of the labor market showed that several industries, including construction, finance and temporary services, shrank. At the same time, leading indicators like wages and the length of the average workweek, which tend to grow before employers begin adding more jobs, actually contracted.

Most analysts are not yet forecasting an outright slide back into recession, but at a time when President Obama and Congress are focused on spending cuts, Europe is in financial crisis and even China’s growth is slowing, there is little expectation of anything other than a prolonged slog for the United States economy.

Recent debates in the US Congress have focused on the huge public debt and how to address it, raise taxes, cut spending, or both. If you are concerned about employment, it does not look like a good time for worrying about debts, but recent political battles have focused on the debt limit and whether to increase it.

Budget strains were evident in the public sector as the federal government slashed 14,000 jobs, and state and local governments cut an additional 25,000. Nearly three-quarters of the job losses at the local level came in education.

Clearly, further cuts in government spending need to balanced by expansion in the private sector. That takes time, and the priorties may be different, but some are still optimistic.

For hopeful signs, some economists pointed to more recent data showing a pickup in retail sales at chain stores and a rise in an index of business hiring. In manufacturing, analysts expect an increase in auto production in the fall, partly because disruptions in supply will have diminished and partly because of built-up consumer demand.

Daniel J. Meckstroth, chief economist of the Manufacturers Alliance, a trade group, said consumers who had been delaying purchases of cars, washing machines, refrigerators and other big equipment that breaks down over time would eventually start buying again as they paid down debts.

“Spending was severely cut during the recession,” Mr. Meckstroth said. “Now, the longer you wait, the more pressure there is to make purchases. You can’t postpone some things indefinitely.”

Others believe this thinking is overly optimistic.

the dilemma of stimulus now

U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee today, and this report gives a helpful glimpse at the difficulties he faces.

We learned in the 1970’s, when OPEC first managed to raise oil prices, about the double-edged sword of stagflation. Oil has become such a strong supply side influence that it can cause both inflation and slow economic growth.

Bernanke wants to maintain the Fed’s 600 million stimulus package to battle low growth rates and unemployment that is still around 9% in the U.S. The problem is that many Americans–and many in Congress–are afraid of inflation and the large public debt in the states.

It is a dilemma, but with inflation at only 0.8% over the last year, I agree that Bernanke is emphasizing the correct problem, despite higher oil prices. The time to fight inflation and deficits is when we see strong growth.

On the other hand, perhaps the American economy has reached income levels where more growth should not be emphasized.

new stimulus

US President Obama has introduced a new stimulus plan, one that should have been introduced two years ago.

Obama, scrambling to spur job creation, proposed a six-year plan on Monday to rebuild infrastructure with an initial $50 billion investment and prepared new business tax cuts.”We are going to rebuild 150,000 miles of our roads — that’s enough to circle the world six times. … We’re going to lay and maintain 4,000 miles of our railways — enough to stretch coast-to-coast,” Obama told a labor rally in Milwaukee where several thousand supporters cheered his every line.

Of course, Republicans and some business leaders were quick to criticize the plan, but the real advantage of it is job creation. The first stimulus was focused on the financial industry. It did not lead to more employment because the subsidies did not lead to more investment.

The White House stressed the plan would not add to the record U.S. deficit, a key issue for voters.

“One thing (Obama) is willing to put on the table is closing some of the tax loopholes for big oil and gas companies that currently get subsidies from taxpayers that they certainly don’t need. He thinks that is a perfectly good ‘pay-for’ to get this up and running,” the administration official said.

Not sure that eliminating that source of campaign contributions is going to help with Obama’s re-election, but this should continue to attract votes among middle class voters. From an economic standpoint, this is a better example of the kind of stimulus Keynes suggested for pulling out of a demand-deficient recession. Let’s wait and see of the US congress can throw-off the chains of their election funding and do something for the majority of Americans.

china spending for the poor

China is targeting new stimulus spending for minorities in an effort to minimize social unrest.

In a speech that is China’s equivalent of a state-of-the-nation address, Premier Wen Jiabao said the government would more than halve the increase in spending, to 11.4 percent, as it eases off the heavy stimulus that warded off last year’s global recession. Still, Wen promised hefty outlays for pensions, education, health care and subsidies for farmers to buy small cars and household appliances — all to spread prosperity more fairly.

“Everything we do, we do to ensure that the people live a happier life with more dignity and to make our society fairer and more harmonious.”

While expecting growth of 8% this year, domestic demand is falling among fears of inflation and perhaps a bursting bubble for housing prices.

“The Chinese nation’s life, strength and hopes lie in promoting solidarity and achieving common progress of our ethnic groups,” Wen said. “We need to take a clear-cut stand against attempts to split the nation, safeguard national unity, and get ethnic minorities and the people of all ethnic groups who live in ethnic minority areas to feel the warmth of the motherland as one large family.”

Perhaps surprisingly, budgets are rising more for social causes than for the military, which has expanded Chinese influence on the world’s sea lanes, presumably to ensure transport of goods in and out of the country.

Of course this all sounds positive, though the true justifications are likely more pragmatic than philanthropist. Targeting the lower classes is more likely to result in respending than if the wealthy were the first beneficiaries.

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bullet trains for economic growth

Some of this story about the Chinese bullet trains is really impressive.

The Chinese bullet train, which has the world’s fastest average speed, connects Guangzhou, the southern coastal manufacturing center, to Wuhan, deep in the interior. In a little more than three hours, it travels 664 miles, comparable to the distance from Boston to southern Virginia. That is less time than Amtrak’s fastest train, the Acela, takes to go from Boston just to New York.

Even more impressive, the Guangzhou to Wuhan train is just one of 42 high-speed lines recently opened or set to open by 2012 in China. By comparison, the United States hopes to build its first high-speed rail line by 2014, an 84-mile route linking Tampa and Orlando, Fla.

OK, bragging rights over the US are one thing, but the really impressive part is the economic stimulus this investment provides for both short term and long.

Of course jobs are being created now with the construction of the trains and tracks, but the new, fast transport will also improve the mobility of labor and other resources needed in an expanding economy.

(Don’t forget to visit alphainventions.com)

does interest elasticity matter?

Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

(Don’t forget to visit alphainventions.com)

stimulus programs effective?

In the US, this debate over a new stimulus program points to a radical change in the economies of developed countries since the 1930’s.

In its last vote of 2009, the House narrowly passed the bill, 217-212, without a single Republican supporter.

Democrats tick off the job prospects from the House bill’s $75 billion in infrastructure and public sector spending: tens of thousands of new construction jobs, 5,500 more police officers, 25,000 additional AmeriCorps members, 250,000 summer jobs for disadvantaged youth, 14,000 part-time jobs for parks and forestry workers.

It may be, though, that the republicans’ doubts are realistic.

The job creation issue is complicated. Much of the money in the House bill goes to programs that may stimulate the economy but don’t appear to directly put people to work.

There’s $41 billion to extend unemployment benefits for six months and $12.3 billion to extend a health insurance subsidy for people who have lost their jobs. There’s extension of a child tax credit for poor families, $23.5 billion to help states cover Medicaid costs and $23 billion so states can support some 250,000 education jobs over the next two years. An additional $2.8 billion goes to clean water and environmental restoration projects.

Even the investment in “shovel-ready” highway and bridge projects may not immediately translate into a reduction in the nation’s 10 percent unemployment rate.

It looks to me that the recipients of this new stimulus are government supported projects that probably already have plenty of people available to provide some extra services without hiring new workers.

Dan DuBray, spokesman for the Interior Department’s Bureau of Reclamation, said “Projects in Reclamation are much akin to planes waiting on the taxiway waiting to take off.”

The difficulties point to one of two things, either Keynesian style stimulus programs are no longer viable for modern economies, or the US government is diverting funds towards programs that support the wealthy rather than those in need.

Conspicuously absent from the House plan were President Barack Obama’s proposals to attack unemployment through tax credits for small businesses that create jobs and for homeowners who make their dwellings more energy efficient.

A job-creating tax credit for small businesses has support among some Democrats in the Senate, even though critics fear it may be too complex to work.

It may be that Keynesian policy is no longer viable, but I am afraid also that I do not trust the motivation of the American lawmakers.

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will monetary policy work?

This article claims that Ben Bernanke has probably been reappointed chairman of the Federal Reserve. However, the article’s real topic–the real argument–is that Bernanke and the Fed. are the most likely source of meaningful help for the economic downturn.

As my students will recognize, this is a very monetarist argument, dependent finally on the Quantity Theory of Money, where money supplies are the final determinant of production.

Another perspective (Keynesian) might argue that monetary policy is ineffective if people are unwilling to borrow even at low interest rates.  The following bit suggests that the Fed. recognizes this as a problem, but not much of an argument that these problems can be overcome.

He has ordered the Fed’s bank examiners to muscle banks into boosting their lending. This often requires an examiner to tell a bank that it should value a property used as collateral higher than it may want to. The Fed is also reviving the market for the bundling of loans for small businesses. And it is bending the arms of potential investors to put more capital into banks to increase credit.

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socialism? shhhhhhhh

Robert Reich has published a new article titled The Economic Reality That No One Wants to Talk About. He claims there that the stimulus packages aimed at ending unemployment will bring underemployment–employment at lower wages–because of the structural changes in the US economy.

Not sure that people are not talking about this, They are certainly discussing the strength and weakness of different stimulus plans, and I wonder what you think if Reich’s proposed solution?

…permanent new investments in the productivity of Americans.What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that’s done here in the U.S., better and more efficient public transit like light rail, a power grid that’s up to the task, and so on.

That sounds socialist enough that most Americans would refrain from bringing it up. Maybe that is what Reich meant.

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