Advance publicity suggests President Obama will present, on September 7, a program for infrastructure improvements. At best, this will be a temporary taxpayer-funded stimulant. It may win political points but will not be a solution to economic problems and sustained job creation. Structural problems in the economy preclude growth in jobs and GDP necessary to satisfy the voracious appetite of Obama and Democrats for taxes. Republicans' calls for targeted tax reduction aren't adequate either. No one indicates an understanding of the real nature of the economy today and the collapse of 2008. They blindly use the same metrics as in past business cycles that don't apply today. Past recessions in the “old” economy, had two factors in common. Energy prices and interest rates put pressure on consumers and/or businesses. Manufacturing was a major component of GDP. Recessions were initiated either by consumers curtailing consumption or businesses reducing capital expenditures. Inventories were reduced and jobs temporarily curtailed until equilibrium was reestablished. Today is different.

The “new” economy is controlled by the financial industry, fraught with excesses like those leading to the housing collapse in 2008. Consumption is 70% of GDP, yet manufacturing is down from 30% of GDP in the 60s to 10% today. Only 9% of jobs are now in manufacturing where the middle class prospered traditionally. We produce cars, airplanes, heavy equipment, chemicals, drugs and some IT products. We no longer produce essential consumer commodities, such as textiles, shoes, durable goods, electronics, home furnishings, etc. If Americans consume, they will buy many imported goods with no benefit to US jobs. Foreigners actually view the USA as a “retail economy.” It's not likely that large purchases, such as autos, will be a part of the average consumer's purchases under their current financial conditions. While there is a lot of hype about how the auto industry is recovering, sales are still down from 17 million units in 2007 to 12 million now, still requiring a 40+% increase to get back to “normal.” Won't happen soon! Obama acolytes are now promoting a 13 million/year sales rate as a great target. Consumers won't be buying airplanes or bulldozers either. It's sad but true that the “service industry” cannot provide jobs and sustain the economy. The Obama administration and advisers apparently don't understand this. Ignorance about the structure of the economy is inexcusable. Worse!

The false claims of the 80s and 90s were that the “service industry would save the US economy,” with constancy of growth, recession resistance, jobs and more. The 90s did boom and similar is needed now, but won't happen. Why? The period was atypical. The most ludicrous claims of those who now promote increased taxes is that “Clinton's tax increase created the boom.” Robert Rubin espoused this saying that the tax increase “took the pressure off the long bond.” Robert Reich's explanation was “investments in education and healthcare made workers more productive.” Utterly preposterous!

There's a lesson in the 90s, but the president and his advisers must not think it necessary to study it analytically and objectively. Or, they want to hide the truth. They rely on advice of academic economists and theory, albeit not only unproven but failed, surely inapplicable to current problems. In 2004, I researched, and wrote about, the 90s prosperity. A summary is pertinent, even necessary to understanding today's situation and the false information we're subjected to.

Oil price played its normal roll by increasing $20/barrel during the Gulf war and reducing by $30/barrel after the war. At 20 million barrels/day usage, this turned $400 million/day flow into oil (70% out of the US) into $600 million/day kept in the US economy. Interest rates participated also as The Fed lowered the fed funds rate from 9 3/4% to 3%. With rates near zero today, The Fed is out of interest rate ammunition. The internet boom poured billions of dollars into the economy, much of it wasted by inexperienced and inept managers, many of whom who failed, but money flowed. Telecom companies spent $60-80 Billion/year, mostly on fiber optics to support the internet. Capital flowed like rushing water. The internet is established and vital today, but will not supply the jobs once found in manufacturing. Capital “burn rate” became standard terminology. The Y2K “problem” pumped $440 billion into the US economy according to Dr. Leon Kappleman of the SIM Y2K Working Group. Then came the clincher for the 90s that led to the crisis of 2008. In 1994, Clinton's executive order to stimulate “housing for everyone”, a concession to Treasury Secretary Rubin's bankers under the auspices of the 1977 CRA, set up the sub-prime mortgage fiasco, the excesses of Fannie Mae and Freddie Mac and the resultant fraud by Wall Street bankers. By 1995 the housing “bubble” grew to 4-fold previous sales. Then came the 2008 collapse. Much of this collapse will be long-lived, perhaps permanent. There's more, but this is enough to define the 90s and differentiate the period from today.

Obama's proposals aren't likely to solve structural problems to create growth, permanent jobs, capital formation or economic stability. If he and advisers don't understand the problems, they can't solve them. They can only do harm, and they are doing it. That's the dilemma we are in. It's a matter of inadequate leadership, lack of knowledge and just plain ineptitude. All Americans are victims.

Joe Mann, September 2,2011


  1. Obi Wan's comment about Mos Eisley could stand repeating here.

    "You will not find a more wretched hive of scum and villainy. We must be cautious!"

    Or something like that.... Funny that earlier in my life I would not have ever thought that I would make such a negative comment about my government. But here I am doing my best to bring down the Obama Administration. A murky hive of scum and villainy.


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