Everything in the Democrat Economic Central Planning Arsenal is a Dud

The government told us the GDP growth rate in the first quarter was 1.8%, which is not a healthy growth rate at any time and is especially weak if an economy is recovering from a recession.  In May, the government increased that reported first quarter growth rate to 1.9%.  This was still not good, but it seemed to leave the door open to optimism that while recovery was slower than in other recessions, it would occur.  Then, the bottom fell out.  The first quarter GDP growth was revised downward to 0.4% and the second quarter GDP growth was said to be an anemic 1.3%, which has just been revised down to 1.0%.

Jobs growth is not keeping up with the growth in population.  The annual Consumer Price Index (CPI) stands at 3.6% and is running much higher in the last half year.  The average American worker workweek decreased by 0.1 hours and earnings fell by $0.03, which is no way to keep up with the inflation.  Labor productivity has very unusually been falling lately as well.  These factors bode ill for further hiring.

The rest of the world economy is not in good shape either, so there is no chance that exports will do much to change the bleak picture of the American economy.  The Purchasing Managers' Index (PMI), a measure of business purchasing activity, fell to a two-year low in August to 49.0.  Numbers below 50.0 mean contraction of business activity is going on.  Among the European countries with reduced activity are Great Britain, France, Spain, Italy, Ireland, and Greece.  The positive PMI's of Germany, Sweden, and Switzerland dropped.  The PMI of Japan is at a 3-month low and Taiwan's PMI is very negative at 45.2, its lowest value since January 2009.  Canada's GDP contracted, largely due to a 2.1% drop in exports.  The leading retailer in Australia expects falling sales.  China has a PMI on the edge of contraction and its exports to the U.S. have fallen.  The world economy is staggering.

In the U.S., the favorite Democrat central planning tools of stimulus spending and quantitative easing, or creating money from thin air, have not worked.  What a surprise!  Despite the GDP growth of the first half of the year being only 0.7%, the White House is telling us that GDP growth for the year will be 1.7%.  Wow, what a howler that is!  This means they are predicting growth in the second half of this year at an annual rate of 2.7%.  I suppose they think that growth will occur because businessmen and consumers are trusting that Obama's speech on his economic recovery plans this week will solve all of our problems!  For that to be so, all Americans would have to regress to the point that they believed that he could stop the oceans from rising and cure all of the diseases of the world, as many did when they first voted for him.  I think many even of those favorable voters have learned something since!  Even if that were the case, that growth which has not been evident through August, would have to occur entirely in the last 4 months of the year.

Let us examine a few issues with the stimulus approach loved by socialists.  The CBO, not really a very reliable source, recently released a report saying that the $787 billion American Reinvestment and Recovery Act has really cost us a $825 billion increase in debt.  They claim that they cannot figure out how many jobs were created by it, but it was somewhere between 1.4 million and an unbelievably generous 4 million.  I do not think they seriously try to estimate the number of jobs lost due to the bill.  So let us divide $825 billion by 1.4 million jobs and we find each job cost $589,300.  While some investment is needed to create meaningful jobs, that is enough money to pay someone the median income of $46,300 for 12.7 years!  I could readily provide several scientists with jobs with that amount of money, but the federal government is always incompetent and inefficient!  While I do not believe there is even a 1% chance that the stimulus bill created 4 million jobs, even if it did, each job would have cost $206,250 which would have allowed me to provide at least 1.5 long-term new jobs in my laboratory instead of a mythical job.

The CBO report claims that printing up $0.825 trillion in a $15 trillion economy added between 0.8% and 2.5% to the GDP in real, inflation-adjusted growth.  Printing this amount of money diluted the value of all money by at least 5.5% since 0.825/15 = 0.055.  One could argue that the dilution of money value is proportional to the smaller value of money in circulation, making the dilution much greater than this.  The act of printing that money did nothing to add to productivity so its effects upon production are transitory.  Worse yet, that monetary dilution devalued all property, including the already depressed housing market, and all commodities, such as oil, cotton, corn, wood, and metals.  Despite these huge negative effects, the CBO tells us that the expenditure increased the GDP by something in the range from 0.8% to a totally unbelievable 2.5%.  Well, this is another instance of the very bad track record of the CBO showing its lack of understanding of economics or its adherence to rules which do not correspond to reality.

The CBO then goes on to say that direct government purchases of goods and services have a multiplier effect of 1.0 to 2.5 for every dollar spent!  Well that is very interesting.  If that were so then the stimulus bill expenditure of $825 billion would have increased the GDP by between 5.5% and 13.75%!  Clearly, direct expenditures by government have no advantageous multiplier effect.  In fact, we can calculate the effect from their own numbers for the GDP growth they claim for the stimulus bill.  0.8/5.5 = 0.145 for the lower bound multiplier and the upper bound multiplier would be 2.5/5.5 = 0.45.  These calculated multipliers ranging from 0.14 to a clearly too high 0.45 are way below 1.0, which is more like what one expects from an incompetent and inefficient government with no real interest in human productivity.

Alan Reynolds, an unusually insightful economist, has written an excellent article entitled The Fed vs. the Recovery, which first appeared in the Wall Street Journal on 26 August 2011.  It is on the CATO Institute website here.  He says:

In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.

He notes that industrial supplies and materials account for 34.5% of our imported goods so far this year and capital equipment and parts add another 23% of imports.  Because of the second quantitative easing (QE2) which began in November 2010 and ended in June of 2011, the value of the dollar fell about 15% relative to the Euro.  The Economist's commodity-price index went up 50.9% in a year in dollars, but 22.8% in Euros.  Our import prices rose by a 15.1% annual rate and our export prices rose by an annual 11.4% over the last three quarters under QE2.  These effects reduced the growth of real GDP.

Alan Reynolds notes that

The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar's weakness.

Fortunately for the S&P 500 companies, 46% for their sales came from other countries!  As a result, their operating earnings per share rose from $20.40 a year earlier to $24.86 by June 2011.  Thanks to our government's policy of printing money, this did most Americans little good.

One of the commodities whose price was driven up by QE2 with important and devastating consequences was that of oil.  As I have pointed out many times (thanks to reading Alan Reynolds), every postwar recession except that of 1960 has been triggered by a sudden increase in the price of oil. From August 2007 to July 2008 we had such an oil price spike as the value of the dollar fell and oil prices doubled.  We had another large oil price increase due to the dollar losing value from late August 2010 when Bernanke announced QE2 until the end of April 2011.  The price of oil increased from $72.91 to $112.30, an increase of 54%.  Just the price of oil increasing suddenly has a very negative impact on our economy.  This is aggravated by our refusal to allow reasonable increases in domestic production, which makes us more vulnerable to fluctuations in the value of the dollar relative to other currencies.

Both the Stimulus and the Quantitative Easing efforts have depressed the growth of the GDP and resulted in giving companies every incentive to hire aboard and every disincentive for hiring at home.  Meanwhile, the regulatory, tax, anti-business, promotion of labor cost increases, and anti-energy policies and rhetoric of the Obama cabal has been added to the wrongheaded policies of the Federal Reserve to put us into a never-ending recession.

Asian Droughts and Grain Production and Demand

Russian Prime Minister Putin announced that exports of Russian grain have been banned from 15 August through the remainder of the year.  China has imported 1.2 million metric tons of corn this year.  The total Chinese imports of corn from all countries in prior years has been less than 100,000 metric tons a year.  Ukraine has also canceled several contracts to deliver wheat.  Widespread drought in Russia and across the northeastern corn belt of China for the last two years has reduced their supplies.  The growing middle class in China has also developed an appetite for more pork, chicken, milk, and eggs from animals fed on corn, as well as soft drinks that use corn syrup as a sweetener.  China is expected to pass Japan to become the world's second largest economy this year.  Demand for more and better food has been growing in India, Brazil, and Russia as well.

As recently as 2003, China was a large exporter of corn, when it exported 15.2 million metric tons.  One expert believes China will import 5.8 million tons of corn in 2011 and 15 million by 2015.  Russia provided 14.5% of the world's total wheat exports in 2009-2010 according to the Food and Agriculture Organization.  Egypt is the world's largest importer of wheat, buying much of it from Russia in recent years.  Russia exported less than 1 million metric tons of wheat in 2000-2001, but increased that to 17.5 million metric tons in 2009-2010.  The top five wheat exporting nations in the year ending in June 2010 were:

U.S.                    23.6 million metric tons
European Union  21.0
Canada               18.5
Russia                 17.5
Australia              14.0

Wheat prices leaped upward in 2007 and have stayed higher.  The story is similar for corn, oats, barley, grain sorghum, and sugar beets.  Rice prices started going up somewhat earlier, but continued to be higher since 2007.  One of the factors that pushed prices higher in 2007 was the U.S. mandate that required the use of ethanol in gasoline be set at 4.7 billion gallons of ethanol.  This is scheduled to rise to 7.5 billion gallons in 2012.  Meanwhile, the EPA was supposed to rule this month whether the ethanol content in gasoline could be raised to 15%, but now says the tests on engines will not be completed until the end of September.  Should the required gasoline content of ethanol be increased to 15%, there will be a further upward pressure on corn and meat prices.  More wheat and other crops will be displaced as farmers grow more corn.

There is some reason to believe that demand can continue to be met in the grain market.  Average corn yields in the U.S. have doubled in the last 40 years to 165 bushels an acre.  David Fischhoff, V.P. of Technology Strategy and Development at Monsanto Co., thinks corn yield can become nearly 300 bushels an acre by 2030.  If we do that and end the foolish subsidies for ethanol production from corn, it will be much easier for the U.S. to develop a greater and more lucrative export market as the rest of the world eats more meat, eggs, milk, and grains.  Healthy farm product exports would help to ease us out of the recession and produce some of the jobs we have failed to produce for most of this last decade.

U.S. Sugar Price Nearly Twice the World Market Price

This sugar crisis may not be one of the worst crises in the world right now, but we should never lose sight of the many, myriad ways that the federal government fails the American People with its pursuit of power way beyond its constitutional grants of power.  The U.S. Constitution gives the federal government no power to set food prices or agricultural production limits, yet it does so under the completely spurious claim that it can do anything it wants to our commerce under the Interstate Commerce Clause.  That clause was intended to keep the various states from interfering with trade between the states, but it was reinvented as a power allowing the federal government to dictate the terms of all commerce crossing state lines in the late 1800s and even most intrastate commerce in the 1900s.

One result is that politicians and bureaucrats largely fix the price of sugar in the U.S. by imposing import restrictions on sugar.  These restrictions are controlled to cause the U.S. price of sugar to be much higher than that in the world market.  According to today's Wall Street Journal, the U.S. price of sugar relative to the world market price is the highest it has been in the last decade.  This is a gift to sugar producers, some of whom are abroad, from sugar processors, confectioners, and consumers.  It is as direct a transfer of their income as would be a tax levied on them with the government then handing the tax over to the sugar growers.  No.... actually it is better for the sugar growers than a tax, since they do not lose a part of the money to bureaucrats as they handle it.

The global sugar price is 19.67 cents a pound, but the U.S. price is 35.02 cents a pound.  Until 1 April, the import quota on sugar is 1.3 million metric tons, which it has been set at since 1990, despite a growing population.  To be precise, there were two momentary exceptions:  after Hurricane Katrina in 2005 and a large sugar refinery explosion in 2008.  The historic price differential has been about 8 cents per pound, but last week it was 17.32 cents per pound, which is the highest it has been since 1999.  The import quotas are given by country and were set in the 1970s.  Jamaica and Haiti and others no longer export sugar to the U.S. at all, so only about 1.2 million metric tons is actually imported even though the overall quota is higher than that.  The USDA may reallocate the quotas by country to allow some countries actively exporting sugar to the U.S. to export more sugar to us.

It turns out that one peculiarity of these import restrictions is that the exporter, as long as he is within his country's export limit, is paid the higher American market price, not the world market price.  So, American consumers are offering such exporters a bonanza profit.  Once a country meets its quota, a stiff tariff of 15.36 cents a metric ton kicks in.  India and Brazil are the worlds two largest producers of sugar, but bad weather in both countries caused the world sugar price to hit a 29-year high on 1 February.  Supplies have improved since then.

Not only are Americans paying ridiculously high sugar prices, but we may run out of sugar before September when new supplies will be available.  Last year, U.S. supplies of sugar fell to 49 days worth by the end of September and they are projected by the USDA to go as low as 38 days inventory this year.

Of course, social engineering or Nanny State supporters are not likely to become too upset by high sugar prices.  If the import quotas did not keep the price of sugar high, they would be advocating a sugar sin tax.  Come to think of it, some of them are doing that anyway.

Leon Aron - Back in the USSR?

Leon Aron is the director of Russian studies and a resident scholar at the American Enterprise Institute. On Monday, 14 July, he published a column in the Washington Post providing an interesting update on Russia. He draws a parallel with the USSR under Brezhnev, when the USSR was benefiting from high oil prices in the 1970s. Under Brezhnev, many of the excesses that later helped lead to the fall of the Soviet Union became SOP. Under Putin and his minions, Russia has become increasingly authoritarian, corrupt, and has burdened the economy with ever greater statism.

In the 1970s the Soviets consumed 8 liters of strong alcoholic beverages each, which was more than the people of any other country. As a result, male life expectancy fell from 67 to 62 years between 1964 and 1980. Now, per capita consumption of vodka is 10 liters according to Russian officials, but experts say it is definitely higher than that. In the U.S. consumption of strong alcoholic beverages is 2.57 liters per capita. Life expectancy for Russian men now is 60.6 years or 15 years shorter than in the U.S. and the European Union.

70% of the food in Russian cities is imported. The denationalization of land in the 1990s lead to food surpluses, which the USSR had not had, but the failure to put land property rights on a sound basis has again led to food shortages. Local officials use their continued power over land rights to force entrepreneurs and farmers to share their output and income with them.

Russia is ruled by the United Russia party, which rigs elections. There is no effective opposition to demand that disastrous policies be changed. Putin has achieved stability in the nomenklatura. His followers are given positions free of criticism and without consequences for their failures.

Russia, with China, has been helping the Iranians with their nuclear program. Russia is once again flying planes along the edges of our airspace in practice attack sessions. As the country has come under increasingly dictatorial rule, it has followed the usually increasingly aggressive nature of such regimes. But, the present rulers are also repeating the mistakes of Brezhnev and company and are setting Russia up for another fall when oil prices drop and can no longer support such a rotten structure.

U.S. is to Food as OPEC is to Oil

The United States is in many respects to food production similar to OPEC with respect to oil production. The U.S. has a huge impact on the world price of food and affects prices in good part with Federal government mandates and price controls largely dictated by the huge Farm Bill passed recently and its predecessors. As a result, the U.S. government and many state governments also act in constraint of trade in food in many profound ways. When we pass a NOPEC bill in Congress which allows lawsuits against OPEC for their acts in constraint of oil trade and for conspiring to affect the cost of oil in the U.S., we are acting rather hypocritically. The OPEC nations might say that if we want to play that game, they can play it also. A lawsuit now has been initiated against OPEC in response to their constraint of the oil trade. Might OPEC nations respond with laws against the restraint of trade in food and follow-up with lawsuits of their own?

I am not suggesting that what OPEC is doing in the oil markets is wise or that it is moral. But, their restrictions on oil production are not different than our own refusal to explore and develop many of our suspected oil resources. As we will discuss here, we also have a huge impact on world food prices and we clearly manipulate those in many ways which also have nothing to do with the free market. As we complain about the sharp price increases in oil, much of the rest of the world is complaining about the great cost increases in food. We should allow the free market to develop our oil resources and we should allow it to control food production also.

Thomas Barnett wrote an interesting commentary published on 11 June 2008 in the Washington Times, entitled "U.S. edge in global food trade." On the Scripps Howard News Service it is entitled "U.S. sits pretty in global food trade network." Barnett only mentions concerns with the hypocrisy of our food manipulation policies in passing. The point of this article is that he is proud that we are as dominant as we are in the food production business. I am also proud of that and we should have enough self-confidence to allow the free market to prevail. Barnett says, "When the professional fearmongers try to scare you with America's 'oil addiction,' remember this: If the world's got us over the barrel on energy, we've got the world over a bread basket." Here are some of the interesting facts that Barnett notes:

• North America exports 105 million metric tons, the former Soviet Union nations export 21 million, South America 18 million, and Australia/New Zealand 9 million metric tons. Of this the North American share is 68%.
  
• The net importing regions are: North Africa and the Middle East import 58 million metric tons, Asia imports 47 million, sub-Saharan Africa 17 million, and Europe 12 million metric tons.
• North America imports half its oil, while the Middle East imports three-quarters of its food.

Barnett also discusses how global warming will help North America produce more food and cause people to use less energy, which will hurt OPEC. Since I do not think the global warming scare will last as people become more aware of how flimsy the arguments for it are and because a productive world will continue to have a great deal of use for oil, I am not too interested in Barnett's arguments here. But, it is clear that the demand for food is such that more farmland is being put back into production. He notes that Dakota farmers are presently tilling fields that have laid fallow for decades and that land speculators are counting on increased production in Russia, Ukraine, and Kazakhstan. He also notes that the Chinese are running around the world buying up arable land in other countries.

He notes that food is about 0.1 to 0.2 of a household's spending in industrialized nations, but is as much as 0.8 of household spending in developing nations. Today, only 7% of rice is traded globally and 12% of corn is traded. He believes these percentages will increase and that the global food trade network will become as important as the global energy trade network. Rather than moan so much about the cost of oil, we should produce more food for export. Of course, we should also produce more oil and gas as well.