Ed Huntress wrote:

"jim" wrote in message
.. .


Not really - the public debt equals the trade deficit

They're pretty close, but they look like two examples of a broader economic
and policy dysfunction. And if you look back before 1980 or so, there's
little connection between the two.

Before 1980 there wasn't that much of either



I'd say the mid-70s is about the time we became dysfunctional. And the real
bubbles started with Reagan's deficit spending. More recently, tax cuts and
deficits being run while the economy was growing have taken on a
dysfunctional life of their own.


Are the employment rates we saw in those years
sustainable without some kind of bubble?

What would be the negative impact of maintaining
full employment through deficit spending?

It depends on whether the economy is growing faster than the deficit.
Deficits are justified, and their stimulus is positive, if they decline as a
percentage of GDP.


That was a fuzzy political speech not an answer.






Keep in mind deficit spending
does not mean excess spending
It can as easily mean more money
available for consumers to spend (lower taxes)

Well, the usual analysis is that deficit spending can represent investment
in the economy, through infrastructure or otherwise, more than consumer
spending, unless the stimulus to spending is necessary because of slow or
negative GDP growth.




I don't profess to know. It's just a nagging question that bugs me every
time I think about trends in employment. Manufacturing is an example that
really prompts the question. As much as productivity has improved, how
many
people can we realistically sustain in manufacturing jobs?

Do you mean how many millions of jobs can the US support in China?

No, I mean how many can we support here. Our productivity is roughly ten
times that of China and our manufacturing output, except for the current
recession, continues to grow, despite what most people think.

We continue to support tens of millions of jobs in China
but can't figure out how to support jobs here?










If you look at the high employment rate (64.6%)
of the year 2000 as the norm
Then current employment (58.4)
is down about 10% from the norm

But that 2000 rate is the extreme *peak*. Why should that be the norm?
That
occurred at the tail end of the dot.com bubble.

There is no reason to believe a smaller portion
of the people want to work today

The question is not whether people *want* to work. The question is whether
the economy can realistically provide jobs for such a high percentage of the
adult population, in this late stage of industrialization and the service
economy.

The economy can reach equilibrium at just about any level of employment

It might be worth examining the glaring contradiction
in the current state of affairs with respect to employment

on the one hand the economy can't support such a large percent working
On the other hand the country can't meet its social obligations
because only a small percent is working
Sounds like a mind set of
having cake and eating it too






So what do these recently high "unemployment" numbers mean? It's an
interesting question, but it's curious that the historically
unprecedented

It means the jobs exist they are just not being filled
Firms have the capacity to hire every one
But they don't have the sales to support that level of hiring

I don't think they have the capacity to hire everyone, and I don't think
that demand can naturally go that high. No country has ever pushed
consumption as far as the US; there are no examples of higher levels of
general consumption to look to. Of course, you know that there is a bottom
level to unemployment, based on normal job-changing, company growth and
decline, and other "frictions," as they're called in labor economics. It is
not desirable to have everyone working at the same time because of the huge
pressure that would put on labor costs.

A couple of years ago
The economy had the capacity for full employment
Not much has changed in terms of capacity
Full employment would be where everyone is either working
or if laid off has a good chance
of getting another job within say 6 months









percentage of adults who have been employed in recent years parallels
that
giant sucking sound of wealth and incomes to a minute slice of
population
at
the top of the economic heap.

So current low employment would mean the opposite?
I.E. not so much money being made by that top tier

Not necessarily, but the correlation is curious, if possibly
coincidental.


The middle class may not be accumulating wealth
in the form of consumer goods
But they are also not accumulating debt
And the federal deficit is where the money is going
It's not going to the top earners.

Oh, yes it is. Money is coming OUT of the federal government, as deficit
spending, and going into the general economy. And the top earners are
winding up with the bulk of it.

Where is the evidence for that?

For what? That deficit spending runs up deficits on the part of the federal
government and disperses that money in the economy? Take a look at M2 and M3
while deficit spending is going on. Or do you mean what evidence is there
that top earners are winding up with the bulk of it? Census and SSA figures
will show you how the distribution is going by quintile.

The question was where is your evidence that the
bulk of the current deficit spending is going to top earners

The evidence is that it is going into ordinary savings deposits
and going of pay off past debt of consumers and small businesses

the increases in those areas in the last 30 months
far outweighs the federal deficit for the same period






It looks to me that the federal excess spending is being
sucked up by the middle class and small businesses
to fix up their balance sheets
The federal deficit is not sufficiently large
to offset the current level of
reduction in private debt plus
the increase in savings
There nothing left over for the very rich

I think you should spend some time with the figures from Census, SSA, and so
on. The figures on incomes and wealth accumulation are widely available.
Unka' George can probably churn up some URLs for you. I'm researched out for
today.

We are talking about where the deficit spending
goes today -
Where it went in the ~30 years
prior to 2009 is now water over the dam









Of course you take away the federal deficit
and you have a full blown depression

Possibly.

What? Do you expect that
suddenly the consumer is going to suddenly
start buying goods and services
if the government stops spending ...

No. But stopping government deficits does not normally lead to economic
decline. Look at historical GDP figures versus federal deficits. Until the
past few decades, we had lots of growth without deficits.

Currently the deficit spending is a finger in the dike
normally that is not the case.
Normally if you move the finger
nothing dire happens

-jim




I say "possibly" because there's a good chance that ending deficits right
now would send us into deflation and an economic death spiral. But nothing
is absolute about it; as the historical numbers show, we've pulled out of
some bad recessions in the past without it. It's just that it's extremely
painful to do so, and it wrecks a lot of lives. And there's always the
chance that we've crossed some threshold that could throw us into another
great depression.

...and start taking more out of the consumer's paycheck?
How is that even a remote possibility?

Again, the historical record shows that we always come out of recessions
eventually, no matter how much or how little deficit spending goes on, or
what consumers' paychecks look like in the meantime. It's not a question of
what will eventually happen. It's a question of how many families and
individuals you're going to wreck, financially, while getting to the other
side.






what was unsustainable is the level of consumption
that produced that high level of employment
And that was unsustainable because it was financed
by private debt which can't go up forever

Certainly that is a big factor, maybe the biggest. But that's just
another
type of bubble. In other words, given higher levels of saving, is out
present level of employment sustainable? Or is this the new norm? Has
productivity improvement resulted in a new, much higher level of
structural
unemployment?

What you are ignoring is the trade deficit

I'm not ignoring the trade deficit. I used to write about international
trade and manufacturing for publication. The effect of trade deficits is not
so clear-cut. The problem is *prolonged* trade deficits, with manipulation
going on that prevents the textbook adjustments -- like the decline in
currency values that Milton Friedman and the Chicago School said were
inevitable, quick, and efficient. Experience has shown that they are not any
of those things.




In fairness, I've been asking this question for over 30 years, and my
fears
have yet to be realized. g But only in retrospect do I realize that our
economy has been pumped up with one unsustainable bubble after another.
How
many more rabbits can we pull out of the hat? Is it limitless?


There is no evidence that any bubble
has produced any growth
in the long run.

I don't know if that's true, but that doesn't mean that bubbles are
desirable in any case.





the over-valued dollar is what creates the necessity that
somebody has to go into debt if your net national exports
are -$0.5 trillion a year
The private sector went deep into debt in the last 30 years
to finance the consumption and growth and the trade deficit

But that is done now
they aint gonna do it anymore

So now what?

Good question. If you come up with an answer, let us know.

There seem to be 3 possible courses

1) Balance the budget and create a depression
this would be to follow the theory that
"what doesn't kill you makes you stronger"

2) Carry the economy on the backs of the Fed
create full employment and large Federal deficits
Eventually that will lower the value of the dollar
and slowly goods will drift back to being Made in USA
at the same pace they drifted away in the last 30 years

3) Maintain your structural high unemployment
and limp a long with little growth
and slowly declining wages and living standards

(1) would set a new economic equilibrium much lower that what we have, and
it could take generations to regain what was destroyed. That was the danger
that many worried about during the Great Depression.

(2) would destroy most markets and leave us completely dysfunctional while
we raced to the bottom against the mercantile trading countries that were
trying to salvage their exports to the US.

(3) seems most likely, although the decline could be sharp and could turn
into a bottoming plateau from which we begin more vigorous growth.

But then, it's looked likely several times in the past. The first one I
remember was 1971. That one was scary to those of us who were looking for
our first real jobs.

--
Ed Huntress