Decline of the Empire

The Propaganda Blitzkrieg Begins

In The Coming Economic Propaganda Blitz, I warned you about a future disinformation campaign designed to convince you that Happy Days are here again.

Let this post serve as your first warning. The Bureau of Economic Analysis (BEA) within the Commerce Department is going release the advance estimate for 2010 4th quarter Gross Domestic Product (GDP) on January 28, 2011. This estimate is likely to show the economy growing at a 4% (or better) annual rate. But that won't be the end of it—not by a long shot. Due to the Fed's bond buying (QE2) and the massive tax cuts just enacted by Congress, growth in subsequent quarters is also going to be considerably higher than it would have been.

Well, you might say, isn't that a good thing? Doesn't that indicate that "The Economy" is finally kicking into gear? That's certainly what the Powers That Be want you to believe. The problem is that there are two economies, not one. See my post "The Economy" — America's Great Lie. There's the economy where the well-off and the rich folks dwell, and there's the other one where ordinary Americans live. If the former is thriving, and it is, and the official statistics lump the two together, it will appear that everybody is better off.

I missed my bet on GDP growth. Last Friday's advance release by the BEA said the economy grew at "only" a 3.2% annual rate in the 4th quarter of 2010. Mea culpa! However, the number was easily high enough to get the propaganda campaign off the ground.

The Statistical Recovery. The graph is from Tim Iacono, who notes that "for all of 2010, the economy expanded 2.9 percent, up from a 2.6 percent contraction in 2009, and the best performance since 2005 when growth registered 3.2 percent."

Various analysts went through the numbers that contributed to or substracted from GDP. Discerning readers of DOTE thus have an opportunity to identify which analysts are honest brokers, and which are eager, willing servants of the propaganda machine. In a recent (very small) survey I conducted,  it turned out independent analyst John Mauldin is an honest broker, while Bloomberg's Caroline Baum and Salon's Andrew Leonard are merely tools. Here are excerpts from the propagandists. First, Andrew Leonard—

Let's give a big shout out to the American consumer, who is flexing muscles that haven't been seen in these parts since before the financial crash. On Friday, the Bureau of Economic Analysis released its first guess as to the GDP growth rate for the fourth quarter of 2010, and the numbers are pretty good: A respectable 3.2 percent -- underneath the consensus expectation of economists, but better than the 2.6 percent registered in the third quarter...

But there's a number inside the number that has the economic data crunching geeks very excited... registering economic growth while inventories are falling is a very encouraging predictor of future economic growth, because it implies that businesses will have to restock again...

Consumers came out to play in the fourth quarter, and they were buying some big ticket items. The Journal's Phil Izzo tweets that a third of the increase in spending was accounted for by auto sales. Good thing the U.S. still has an auto industry around to take advantage of that! (Hmm, wonder who gets credit for that?)

But for now, the report is pretty good news, and suggests even stronger growth at the outset of 2011. Now, if only the U.S. labor market would get the hint, and start popping.

And now Caroline Baum—

The pieces just don’t add up. Credit card debt outstanding has fallen 27 straight months for a total decline of $177.2 billion. The unemployment rate has been stuck above 9 percent for 20 months. Average hourly earnings rose 1.9 percent in 2010. Personal income rose less than 4 percent in the 12 months ended November. About 23 percent of homes with mortgages are worth less than the amount of the loan.

Faced with these not insignificant hurdles, what did the U.S. consumer do? Why, he spent like there was no tomorrow.

Retail sales jumped an annualized 14 percent in the fourth quarter, a spending pace that’s been equaled only once in the last 18 years. (The Census Bureau changed the methodology for calculating retail sales in 1992 and says the data aren’t comparable to earlier measures.) For the year, retail sales rose 7.9 percent, matching the 2004 increase and the biggest since 1999...

Is the American consumer back to his old shop-’til-he-drops ways? It sure looks that way on the surface.

And who can blame him? All the incentives are urging him to spend, spend, spend. The interest earned on checking and savings accounts is so minute it’s hard to find on the monthly bank statement. Economic theory teaches that high real interest rates are an inducement to defer consumption. Low real rates encourage consumers to spend today...

[But] there’s another possibility that would better explain the inconsistency between weak job and income growth on the one hand and robust spending on the other.

“I think a credible case can be made that income and employment are being understated,” says Joe Carson, director of economic research at AllianceBernstein.

Exhibit 1 is Treasury data showing that fourth-quarter withheld income tax receipts rose 17 percent from a year earlier, according to Carson. “How can personal income be up 4 percent” when withholding rose more than four times that rate? Even wealthy liberals aren’t rushing to pay taxes on money they didn’t earn. For that reason, tax data are considered the most reliable source of information.

Exhibit 2 is the tendency for spending data to provide a more accurate reading on the economy than statistics on income and employment, according to Carson...

Yes, you read that last part correctly. Caroline quotes Joe Carson as saying that the government is understating income and employment! That must be the case because "consumers" are spending like there's no tomorrow. And tax receipts are up, so the real unemployment rate is probably lower than government data indicates. And incomes must surely be higher.

Wow. I'm almost speechless here. This would be a good time to remind you that America has two economies, one where the well-off and rich folks dwell, and the "other" one where you live. It's people in the rich economy who are doing all the spending, and according to John Mauldin, many Americans are withdrawing money from low yield investments (e.g. money market accounts). See my post Only 35% Of Americans Have Emergency Savings.

At the risk of going on and on, let's quote skeptic John Mauldin at some length. Here is Mauldin on what he calls the "real statistical recovery"—

You remember our old friendly equation:

GDP = Consumption + Investments + Government Expenditures + (Net Exports)

Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation / deflation. This is done by the use of a deflator built in for each category. But the deflator for exports / imports is a little tricky at times.

Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.

Oil in the 4^th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.

I know, I know, I just wrote that because the price of oil went up, the “real” value of imports went down, as well as inventories. Some of you are getting economic whiplash right about now.

If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity... How much did it change things? Lacy Hunt thinks by anywhere from 0.5% to 1%. That means GDP is still a positive number, but there is not a “3” handle at the beginning of it. In the grand scheme of things, no big deal, as it will balance out over the coming quarters and years. But I just wanted to point out (once again) that you have to take some of the numbers we get from our government with a few grains of salt.

From James Hamilton's A modestly brighter GDP report. Hamilton: "There's a clear pattern in the recent data that when one of these [inventories or imports] makes a positive contribution to GDP growth, the other makes an offsetting negative contribution."

Essentially, if you do the math, the quarterly rise in the price of oil (from $81 to $89) reduced the value of current inventories and thus real (inflation-adjusted) imports fell at an annualized rate of 13%. If Mauldin and Hunt's analysis is correct, more expensive oil raised the GDP growth rate somewhere between 0.5% and 1%. And now here's Mauldin on the large increase in "consumer" spending—

The really surprising number you saw the talking heads on TV mention was the growth of consumer spending, at 4.4%. Is the US consumer back? After all, real final sales rose by 7.1%, a number not seen since 1984 and Ronald Reagan. But real income rose a paltry 1.7%. Where did the money that was spent come from? Savings dropped a rather large 0.5% for the quarter. That was part of it.

And I can’t find the link, but there was an unusual drawdown of money market and investment accounts last quarter, somewhere around 1.5%, if I remember correctly. (David Walker remembered that article as well.)

That would just about cover it. But that is not a good thing and is certainly not sustainable.

For additional details, consult Mauldin's A Bubble In Complacency: How Much Longer Can This Last? For example, he also quotes Dave Rosenberg, who says—

There is no doubt that there will be rejoicing in Mudville because real GDP did manage to finally hit a new all-time high in Q4. The recession losses in output have been reversed (though what that means for the 7 million jobs that have to be recouped is another matter). But, before you uncork the champagne, just consider what it has taken just to get the economy back to where it was three years ago...

I've included a lot of quotes here, which has made this post overly long. However, I wanted to drive home the point that the economic propaganda blitzkrieg has begun—I believe I have done just that. To demonstrate this simple but critical point, I had to quote some propaganda and contrast it with actual critical thinking.

What do we have? Nothing has changed. We still have the best statistical recovery money can buy.

Bonus Video — Same as it ever was.

The World In 2037

It has yet to be proven that intelligence has any survival value
   —Arthur C. Clarke

I have to laugh everytime I read the projection that social security will run out of money in 2037.

WASHINGTON – Sick and getting sicker, Social Security will run at a deficit this year and keep on running in the red until its trust funds are drained by about 2037, congressional budget experts said Wednesday in bleaker-than-previous estimates.

The massive retirement program has been suffering from the effects of the struggling economy for several years. It first went into deficit last year but had been projected to post surpluses for a few more years before permanently slipping into the red in 2016.

This year alone, Social Security will pay out $45 billion more in retirement, disability and survivors' benefits than it collects in payroll taxes, the nonpartisan Congressional Budget Office said. That figure nearly triples — to $130 billion — when the new one-year cut in payroll taxes is included.

No doubt social security will come up short some years before 2037 because the economic growth estimates underlying this projection are wildly optimistic. Nevetheless, the availability of social security funds sometime in the 2030s should be the least of your worries right now. I don't expect to be around in 2037, but many of you will be. If this country makes it to 2020 in (more or less) it's present form, let alone to 2037, I will be astonished.

What does the world look like in 2037?

• Oil — The United States managed to produce about 5.5 million barrels per day of crude oil and condensate in 2010. Oil production in the U.S. peaked in 1970. How much do you think we'll be producing in 2037? My guess is about half as much as we did in 2010. And worldwide? The world produces about 73 million barrels per day, but we'll be lucky to be producing 50 million barrels per day in 2037. Do you seriously think biofuels, gas liquids, enhanced oil recovery or heavy oil production, coal-to-liquids or gas-to-liquids conversions, and plug-in electric vehicles are going to preserve business-as-usual? If you do, you get free tickets to Disneyland. Call Walt to redeem them.


• Oceans — By 2037 the world's oceans will be all but fished out. Bounty from the sea? Forget it! Only the super rich will be able to afford some deformed farmed shrimp. If the phytoplankton die-offs continue, the oceans will be as dead as a doornail. The ocean acidification trends are just icing on the cake.


• Climate — If you think that the frequent, severe weather events the world has experienced in recent years are unrelated to global warming, you're living in a dreamworld. The massive Australian flooding that followed an unusually strong La Nina were aided & abetted by warmer sea surface temperatures which made the normal monsoon rains that much stronger. So-called extreme weather events like the recent heat waves in Russia will be far more frequent and destructive by 2037. What we don't know about how a warmer world creates freaky weather is far more frightening than what we do know.

I could go on here—fresh water shortages, pollinator die-offs, general ecosystems breakdown—but you get the point.

We live in a society in which the gap between the rich and everybody else is wide and growing wider. Thus, when push comes to shove, you know whose survival is guaranteed and whose is not. Even if we do not experience actual food shortages in the United States, bear in mind that we don't live in a vacuum. We live in a globalized economy. Soaring commodity prices will affect ordinary Americans just as they affect people in Egypt. Social breakdown will occur long before the factors I've listed interact to create a Perfect Storm.

Nature writer David Quammen quoted Thomas Homer-Dixon in his Planet Of Weeds (Harpers, 1998)—

"Think of a stretch limo in the potholed streets of New York City, where homeless beggars live. Inside the limo are the air-conditioned post-industrial regions of North America, Europe, the merging Pacific Rim, and a few other isolated places, with their trade summitry and computer information highways. Outside is the rest of mankind, going in a completely different direction."

Homer-Dixon said this in 19998, but we know in 2011 that not everybody in those "post-industrial regions of North America" is going to be enjoying their wealth while the rest of mankind goes in a completely different direction. If current income & wealth inequality trends continue, much of America will look like a Third World country. We're well down that path, and in the aftermath of the Great Recession—the banks were saved, they didn't save you—we have no reason to believe these trends will be reversed. The rich will be sipping champagne inside Homer-Dixon's stretch limo. Everybody else will be on the outside scrambling to survive. Many won't. That's what the world looks like in 2037.

So, what about social security? Just leave it alone! We've got much bigger fish to fry. But as we know, some politicians just can't do that. They want to accelerate our journey into the desperate, bifurcated world of the future. They want to get their hands on your social security money now—that's what "privatize" means. Perhaps that's because the dollar won't be worth the paper it's printed on long before 2037. Only so-called "hard assets" (oil, corn, gold, copper) will count for anything 26 years from now. And you already know who is going to own those.

I hope you remember what I said here today the next time somebody whines about social security.

Remedy du Jour -- January 29, 2011

Why do we need some relief this week? Snow jobs, that's why.

WASHINGTON (Reuters) - New U.S. claims for jobless benefits surged last week as snowstorms in some parts of the country kept workers at home, but the underlying trend pointed to an only gradual labor market improvement.

Initial claims for state unemployment benefits jumped 51,000 to a seasonally adjusted 454,000, the highest since late October, the Labor Department said on Thursday. That was the largest weekly increase since September 2005. The rise exceeded economists' expectations for a slight gain to 405,000.

A Labor Department official said four states had reported an increase in claims that was due to snow. In addition, he said, seasonal volatility also affected the data.

Still, the four-week moving average of unemployment claims — a better measure of underlying trends, rose 15,750 to 428,750 last week, implying a gradual labor market recovery that could compel the Federal Reserve to complete its $600 billion bond buying program aimed at bolstering the economy.

"I'll buy that it can be blamed on the weather. But it does show that the recovery is growing in fits and starts," said Peter Tuz, president at Chase Investment Counsel in Charlottesville, Virginia.

@#%&*! Speaking of blow snow jobs, these first two videos are dedicated to the Bureau Of Labor Statistics. You will have to enter your birthday to watch the 2nd one—it's for mature audiences only!

 

 

 

 

Saturday Oil Report -- January 29, 2011

Two weeks ago I predicted little change in the Nymex price, which was $91.47 per barrel at that time. Today the front month contract is selling for $89.49 but briefly dipped into the mid-80s earlier this week. (The Saturday Oil Report is biweekly.) However, there's a geopolitical crisis in Egypt which may lead to a brief closure of the Suez Canal and the Sumed pipeline. This possibility has made traders "nervous" according to the Wall Street Journal, so the price jumped three dollars yesterday.

Predictably, the upheaval in Egypt has caused some to call for the End Of The World—it's time to go out and buy some firearms. I'm a bit more conservative   If I predict the end of the world as you have known it sometime in the future, it's a pretty good bet the end is coming. On the other hand, if you make your living calling for TEOTWAWKI, if you are in the end of the world business, everything that happens is a signal that the end has arrived. Crying wolf is not a good strategy in life if you care about your credibility, and I do. So I'm not going to raise the oil alarm level just yet.

Oil Alarm Level — Orange

The big news in the oil markets is the huge spread between Brent (North Sea) crude and the Nymex. Brent is selling at $99.42/barrel, and if I thought that price was the "actual" price of oil, I would raise the alarm level. Nobody really knows why the spread is so large. Here's a quote from The Gaping Gap Between the Price of Nymex and Brent. Which is Right?

The yawning chasm between the two most widely quoted prices proves the power of a small Midwestern town on the global oil market. Nymex futures are reflecting steadily rising inventories in Cushing, Oklahoma, the oil storage hub where anyone holding a contract when it expires must either purchase or deliver real barrels of crude each month.

The trouble starts when too much Canadian oil heads into Cushing’s web of pipelines, crowding out tank space theoretically set aside for Nymex-related deliveries. In the next couple months, a new TransCanada pipeline promises to bring yet more Canadian oil to Cushing.

Brent represents oil produced in the North Sea, a long way from the glut developing in Oklahoma. It’s also cash settled, meaning no oil needs to change hands. The two contracts usually trade within $2 of one another.

So which contract reflects the “real” cost of oil?

For now, the market’s going with Brent. On the U.S. Gulf Coast, home to some of the country’s biggest oil refineries, Light Louisiana Sweet, a locally produced oil, also trades at $12 a barrel above Nymex–not a coincidence.

Crude stocks from the EIA's This Week In Petroleum

That sounds bad, but consider this from the same article—

But the Nymex oil contract can’t be counted out yet. The benchmark was supposedly “broken” in February 2009, when it traded at a then-record discount to Brent of more than $10. The gap was down to 63 cents two weeks later.

The Nymex price fell this week because of the storage issue. Note that crude stocks have been running above the average range for about 8 months now, and now they're rising again due to the influx of Canadian (tar sands) crude. Still, the differential between the good (light, sweet) stuff and Canadian crap is worrisome.

What does the future hold? As usual, there's a lot of uncertainty. On the one hand, you've got this—

Seventeen of 37 analysts, or 46 percent, forecast crude oil will drop through Feb. 4. Fourteen respondents, or 38 percent, predicted prices will climb and six estimated little change. Last week, 58 percent said futures would decrease.

"Crude should be down near $80 a barrel given that world out there is awash with oil," said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney. "Given that we don't see anything adverse happening out there in the world that would see the need for a build in premium, then I can suggest it'll remain pretty soft."

On the other hand, you've got this from the Journal linked in above—

More worrisome than disruptions to Egypt's oil production is the prospect that the unrest spreads to other hard-line states in the region, such as Libya and Algeria, both members of the Organization of Petroleum Exporting Countries. Other countries in the region, including Tunisia and Yemen, have been wracked by antigovernment protests in recent weeks, though neither is a major oil producer.

"If this thing spreads across the North African continent, gets into Libya, Algeria, then you've got trouble," said Stephen Schork, editor of the Schork Report energy newsletter.

My call? Nymex crude will be trading in the $86-$88 range after the Egyptian situation calms down.

Here are some background posts I recommend you read:

• Peak Oil — Where Do We Stand?


• Quantitative Easing, Oil Prices And Recessions


• Understanding The Oil Markets — 2010 Version


• The Next Oil Price Shock — An Update

The Corn Ethanol Boondoggle Continues

Jim Quinn of The Burning Platform blasts Congress for keeping the ethanol party going in How Many Senators Does It Take To Screw A Taxpayer?

When bipartisanship breaks out in Washington DC, check to make sure your wallet is still in your pocket. Every time you fill up your car this winter you are participating in the biggest taxpayer swindle in history. Forcing consumers to use domestically produced ethanol is one of the single biggest boondoggles ever committed by the corrupt brainless twits in Washington DC. Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3^rd world countries.

The grand lame duck Congress tax compromise extended a 45-cent incentive to ethanol refiners for each gallon of the fuel blended with gasoline and renewed a 54-cent tariff on Brazilian imports. The extension of these subsidies, besides costing American taxpayers $6 billion per year, has the added benefit of driving up food costs across the globe, causing food riots in Tunisia, and resulting in the starving of poor peasants throughout the world. This taxpayer boondoggle is a real feather in the cap of that fiscally conservative curmudgeon Senator Charley Grassley. He was joined in this noble effort by another fiscal conservative, presidential hopeful John Thune...

Source: The Wall Street Journal's Amber Waves of Ethanol

Quinn's article contains plenty of data about why corn ethanol is a really bad idea, so I recommend you read the whole thing. For example, the United States is by far the largest corn exporter in the world, and there's a world-wide food crisis going on now, but farmers in the Midwest will devote 40% of their corn crop to making moonshine (graph above). Global food prices are soaring.

Source: FAO Food Price Index

Those of us who used to write about America's frightening oil import dependency thought we had won this battle years ago. The only people defending ethanol as a workable, efficient substitute for gasoline in 2007 were Iowa corn farmers. And that's still true today. But as Jim Quinn points out, our corrrupt politics never changes—

A bipartisan group of 15 senators signed a letter in late November demanding an extension of U.S. ethanol subsidies. I wonder if the fact that they have received hundreds of thousands of dollars in campaign contributions during the past six years from pro-ethanol companies and interest groups like ADM, Monsanto, the National Corn Growers Association, and the Iowa Renewable Fuels Association had anything to do with this demand. You can always count on a Senator to do what’s best for his re-election campaign rather than what is best for the country...

And because debilitating, destructive political corruption is as constant as the sunrise, I switched gears in early 2010. No longer would I write about the inadequacies and dangers of switching from gasoline to corn ethanol. I gave up. Let's face it, being right about these issues doesn't matter. It's ADM, Monsanto and the National Corn Growers association who run this particular show. South Dakota Senator and presidential hopeful John Thune received $493,600 from Agribusiness during his successful 2010 campaign.

How can the truth compete with that?

Only 35% of Americans Have Emergency Savings

As usual, the truth about the financial condition of Americans is hidden in plain sight. All that's missing is some widespread coverage of the news and some serious reflection about what it means. The Wall Street Journal reported the story in Number of the Week: Americans Dipping Into Savings (January 22, 2010).

Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve . That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year.

To some extent, people are acting exactly as policy makers want, at least in the short term. By holding interest rates near zero, the Fed is creating an incentive to spend rather than save — or to “save” in a different way by paying down expensive debt. With three-month certificates of deposit offering annualized interest of less than 0.3%, using available cash to pay off a credit card that charges 30% or a mortgage that costs 5% makes a lot of sense.

Over the two years ending September 2010, U.S. consumers — largely through defaults, but also through pay-downs — shaved nearly a trillion dollars off their mortgage and other debts, a shift that could make them less sensitive to credit freezes like the one we just suffered.

As the Journal notes, Ben Bernanke wants you to plow through your savings to sustain the miraculous recovery his near-zero interest rate policy has achieved. But there's a slight problem with this happy scenario.

In the longer term, though, Americans need to do more old-fashioned saving as well. One recent poll [xls spreadsheet] found that only 35% of Americans had enough emergency savings to cover three months of living expenses.

The less money they have for a rainy day, the more vulnerable they will be to job losses and other income shocks. As we have learned in the most recent crisis, credit is far from a perfect substitute for a healthy bank account.

The poll is a little out of date. FINRA did an online survey of 28,146 respondents across all 50 states (plus D.C.) between June and October, 2009. Since then, we've experienced the best statistical recovery money can buy. If the survey were done today, perhaps 36%, or even 37%, of Americans have enough "emergency or rainy day funds to cover their expenses for 3 months in case of sickness, job loss, economic downturn, or other emergencies"

The real problem with Americans not having any rainy day funds is that the forecast calls for rain—and plenty of it. At least that's true for those living in the lesser of our two economies, which is roughly 85% of everybody. For most the American Dream has become a nightmare. Vulnerability to shocks is now a way of life. The dream now is to get through another week. Unfortunately, the 454,000 Americans who filed unemployment claims didn't make it through last week.

The Journal says "in the longer-term, Americans need to do more old-fashioned saving." Yes, that's what they need to do some day when good-paying jobs are plentiful, health care is affordable and sound money falls like rain from the sky. My question is: when exactly will that day come?

And the likely answer for the large majority of Americans is: Never.

Andrew Liveris Is The Terminator

Essentially there are two worlds right now: the U.S. and everywhere else. Everywhere else is growing. I'm always excited when I go overseas and when I come back here I'm depressed. We are facing a very slow recovery here in the U.S. We are investing here where we have growth prospects.
   —Andrew Liveris, CEO of Dow Chemical

The main theme of Barack Obama's third SOTU speech was American competitiveness. The President never used the words "outsourcing" or "offshoring" in his speech, but he hinted at it—

At stake right now is not who wins the next election — after all, we just had an election. At stake is whether new jobs and industries take root in this country, or somewhere else. It's whether the hard work and industry of our people is rewarded. It's whether we sustain the leadership that has made America not just a place on a map, but the light to the world.

This historical moment requires clarity. Who is offshoring American jobs? Large multinational corporations based in the United States. How many jobs have been shipped out or created overseas as opposed to being created here? I covered this topic in A Long Term Jobs Recovery — Outsourcing (October 18, 2010).

In addition, the most recent Commerce Department data show that employment at the foreign subsidiaries and affiliates of U.S. multinational firms grew by 729,000 in two years, to 11.9 million in 2008 from 2006. Over that same period, domestic employment by such firms slipped by 500,000 jobs, to 21.1 million [data graphed below].

Now, let's flesh out the meaning of the word competitiveness. In anticipation of Obama's speech, NPR's Steve Inskeep interviewed Dow Chemical CEO Andrew Liveris. Liveris recently wrote a book called Make it in America: The Case for Re-Inventing the Economy.

INSKEEP: When a lot of Americans think about manufacturing and manufacturing jobs overseas, it seems like a very simple question of cheaper labor. There are people overseas who will work for $3 a day, maybe even $1 a day in some cases, and work for wages that Americans would never dream of matching. It'd be a disaster if Americans matched those wages. And is it more complicated than that?

Mr. LIVERIS: Way more complicated. I mean, outsourcing based on wages has really become the storyline of manufacturing, and I think that's wrong. It is more complicated than that. Take Dow as an example. We built this R&D center in China. We now have 500 Chinese scientists working there and they earn incredibly good money.

Industries that are high technology - clean energy, solar, photovoltaics - that conversation and why that is all moving overseas is not about labor costs.

OK, here's where things get interesting. 2011 has barely started, but I nominate the discussion below for "strange exchange" of the year.

INSKEEP: Well, now, that's interesting because here you are, you're the CEO of a multinational corporation, you're a big supporter of American manufacturing, you've just written a book about boosting American manufacturing, but you mentioned that Dow Chemical has opened an R&D center in China. How do you as a CEO decide which of your operations to keep in the United States and which to move abroad?

Mr. LIVERIS: Basically, the rules of the road per country. In essence, do I have in country X, do I understand their tax policies? Do I understand their energy policies? What are they doing to me in terms of regulatory policy? We look at all items on the cost line, all items on the incentive line, and make decisions on that basis.

INSKEEP: OK. What are some lines there where the United States apparently doesn't do very well, since you have moved some operations overseas?

Mr. LIVERIS: Well, I not only have high taxes, I have uncertain taxes. Right now I have more regulations coming at me that are not fact-based, not science-based, not data-based. I actually don't even know what my costs are going to be in the next five years. And so I'm sitting back waiting for regulatory reform, and the government, of course, is now engaged on that - healthcare and the uncertainty around the healthcare bill and what's going to end up happening there. Energy policy - we've got lots of uncertainty in the energy policy regimen. I mean I can keep going, but that's half a dozen.

[My note: Liveris photo from mlive.com]

I have taken the liberty of re-writing the last part of this exchange so we may achieve the clarity I mentioned earlier. I have added some parenthetical notes to Mr. Liveris' recommendations so we may achieve perfect understanding.

INSKEEP: Well, you seem like a perfect hypocrite, writing a book called Make It In America but then going off and creating a bunch of high-paying R & D jobs in China. What the fuck?

MR. LIVERIS: Look Steve, this is the relentless logic of global capitalism. Dow Chemical is a big multinational corporation. Borders mean nothing to us. We are utterly ruthless, this is a dog-eat-dog world. You're being extorted, OK? I'm blackmailing you! We have only one mission at Dow Chemical — make money for our shareholders. That's it!

Think of us as The Terminator. Listen, and understand — we are out there, Steve, you can't bargain with us, you can't reason with us. We don't feel pity, or remorse, or fear. And we absolutely will not stop, ever, until you all your jobs are gone unless you meet our demands. Here they are:

• New infrastructure [you must build it]
• R&D that’s cutting edge [you must pay for it]
• Education that leads the world [make it so]
• A pro-trade policy that creates a level playing field with limited tariffs and barriers to entry [no restraints on trade]
• An alternative energy strategy that will secure the abundant energy that industry needs to remain competitive [free energy for business and plenty of it]
• Regulatory reform [no restraints on business practices]
• U.S. tax policies that support manufacturing – not mitigate against it [no taxes]
• Reform in civil justice needed to support advanced manufacturing and end lawsuit abuse [complete immunity from the law]

Give us what we want—all of it! Or you can kiss your precious jobs goodbye. Am I clear?

You are perfectly clear, Mr. Liveris.

Listen, and understand. That terminator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.

Back To The Future

The President will deliver his third State of the Union address tonight. The intrepid reporters at National Public Radio are simply buzzing with excitement! With all these problems oppressing the nation, what will our Fearless Leader say?

Let's use our handy time machine to take a short trip back to February 24, 2009. It is the President's first State of the Union speech. The O-Man had only been in office a few weeks. Hope was in the air. Change We Can Believe In was hurtling down the runway toward a glorious lift-off. W was gone! Liberals were giddy about our limitless prospects. The nation was saved—or, shortly would be.

Let's listen in on Barack Obama and read along as we do. How has the President done? You be the judge. I have added some emphasis in the text in those spots where I want you to pay particular attention, to jog your memory.

Politicians can not bullshit you successfully if you remember the past, or at least enough of it to see the disparities between what the Reality is now as opposed to what they said and did then. If nobody remembers anything, nobody is accountable for anything. If everybody lives in an Eternal Present, then nothing ever happened and nothing ever will.

Thus, memory serves as a bullshit filter. Bear this in mind as you travel back to February, 2009 to listen to the President's stirring words.

 

I have come here tonight not only to address the distinguished men and women in this great chamber, but to speak frankly and directly to the men and women who sent us here.

I know that for many Americans watching right now, the state of our economy is a concern that rises above all others. And rightly so. If you haven’t been personally affected by this recession, you probably know someone who has – a friend; a neighbor; a member of your family.  You don’t need to hear another list of statistics to know that our economy is in crisis, because you live it every day. It’s the worry you wake up with and the source of sleepless nights. It’s the job you thought you’d retire from but now have lost; the business you built your dreams upon that’s now hanging by a thread; the college acceptance letter your child had to put back in the envelope. The impact of this recession is real, and it is everywhere.

But while our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this:

We will rebuild, we will recover, and the United States of America will emerge stronger than before. [vigorous applause]

The weight of this crisis will not determine the destiny of this nation. The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth. Those qualities that have made America the greatest force of progress and prosperity in human history we still possess in ample measure. What is required now is for this country to pull together, confront boldly the challenges we face, and take responsibility for our future once more.

Now, if we’re honest with ourselves, we’ll admit that for too long, we have not always met these responsibilities – as a government or as a people. I say this not to lay blame or look backwards, but because it is only by understanding how we arrived at this moment that we’ll be able to lift ourselves out of this predicament.

The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank.

We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before.

The cost of health care eats up more and more of our savings each year, yet we keep delaying reform.

Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.

In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. [applause]

Regulations were gutted for the sake of a quick profit at the expense of a healthy market.

People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway. And all the while, critical debates and difficult decisions were put off for some other time on some other day.

Well that day of reckoning has arrived, and the time to take charge of our future is here.

Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight.

It’s an agenda that begins with jobs. [applause]

As soon as I took office, I asked this Congress to send me a recovery plan by President’s Day that would put people back to work and put money in their pockets.  Not because I believe in bigger government – I don’t. Not because I’m not mindful of the massive debt we’ve inherited – I am. I called for action because the failure to do so would have cost more jobs and caused more hardships. In fact, a failure to act would have worsened our long-term deficit by assuring weak economic growth for years. That’s why I pushed for quick action. And tonight, I am grateful that this Congress delivered, and pleased to say that the American Recovery and Reinvestment Act is now law. [wild applause]

[continues after video ends]

Over the next two years, this plan will save or create 3.5 million jobs.  More than 90% of these jobs will be in the private sector...

The College Degree Scam

The cost of a college degree has skyrocketed in recent decades, rising 439% since 1982 (below, left) according to the Bureau of Labor Statistics as reported by CNN Money in Is College Still Worth The Price?

For more than two decades, colleges and universities across the country have been jacking up tuition at a faster rate than costs have risen on any other major product or service - four times faster than the overall inflation rate and faster even than increases in the price of gasoline or health care (see the chart to the right). The result: After adjusting for financial aid, the amount families pay for college has skyrocketed 439% since 1982.

It is not an accident that I date the Empire's decline to the early 1980s. Even as the cost of college soars, it remains true that there are considerable advantages in having a degree in terms of earnings (above, right). If we look at the BLS unemployment numbers, Table A-4 indicates that in December, 2010, the seasonally adjusted jobless rate for those with a Bachelors degree or higher was only 4.8%. Clearly, there is significant advantage in having a degree if you want a job—any job, good paying or not.

All this leads to the exceedingly happy situation we have today, to wit—

1. To get a job, any job, your chances improve significantly with a college degree
2. The cost of a college degree has risen 439% in the last 28 years
3. Obtaining a degree is far beyond the means of most young people
4. To get a degree, and thus have any hope of getting a job, the large majority of young people must become debt slaves (see my post Student Loans — Gateway To Debt Slavery)

These are the choices for most young people—skip college or become a debt slave. This is the college degree scam. Do you remember the last time Ben Bernanke was interviewed on 60 Minutes? I quoted part of this interview in my post The Bernanke Interview — A Tale Of Two Societies.

Pelley — The gap between rich and poor in this country has never been greater. In fact, we have the biggest income disparity gap of any industrialized country in the world. And I wonder where you think that’s taking America.

Bernanke — Well, it’s a very bad development. It’s creating two societies. And it’s based very much, I think, on– on educational differences The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is five percent. If you’re a high school graduate, it’s ten percent or more. It’s a very big difference. It leads to an unequal society and a society– which doesn’t have the cohesion that– that we’d like to see.

The Bernank failed to mention that college tuition has risen 439% since 1982. He failed to mention that to get that degree which may lead to a job, the average American must put himself in hock to the tune of tens of thousands of dollars. And so on.

But then there is alternative #2—skip college. The exorbitant cost of a college degree, including the dubious educational benefits of having it which I described in An Epidemic Of Ignorance, has engendered talk about the benefits of not going to college (see the video below). In fact, that's the main point of the CNN Money article I quoted at the top.

I could go on and on, but I'll stop here, leaving you with these thoughts: only a society that is far beyond the pale would need to debate the merits of higher learning because of its exorbitant price tag. Only a society in a hopeless downhill slide would put a college education beyond the reach of most of its young people.

We live in a society that eats its own young. How sick is that?

Bonus Video

 

The Empire And The Boiling Frog

As I was writing The Deluded And The Insane, I was reminded of the Boiling Frog. Paul Krugman referred to the famous amphibian on July 12, 2009—

Is America on its way to becoming a boiled frog?

I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time.

And creeping disasters are what we mostly face these days...

It doesn't matter that real frogs don't sit in the gradually heated water until they are boiled alive. What matters is that human beings do. That's what makes it useful as a metaphor.

The American Empire has been in decline for almost 30 years now. Yet it is only in the last few years—specifically, since the financial meltdown in October, 2008—that a few Americans have figured out that the United States is not what it used to be. Therein lies the truth of the boiling frog story as it applies to us.

Think about it. Does it make any sense to say the country was doing just fine right up to the moment (more or less) when it wasn't? For example, did the Wall Street banks become overly powerful and greedy in just the few years before the Housing Bubble collapsed? Did their undue influence on our venal politicians begin during those years? Of course not! Events like the financial crisis don't just come out of nowhere. To understand them, you must examine the historical antecedents. You must understand that the ground for what happened today was prepared many years before.

It was the gradual deterioration of conditions in the United States over decades that set up the unfortunate situation we have today. In The Deluded And the Insane, I compared James Wolcott's view of current events with a graph that contradicts it.

Wolcott — "As America enters the downward slope of empire... the Richie Riches have a vested interest in misdirecting people by blaming the powerless for the sins of the powerful."

Share of total income going to the top decile (10%) with my annotations, from Emmanuel Saez's Striking It Richer

The not-too-subtle point I was trying to make is that the income data directly reflects the decline of the Middle Class in America. In my view, the decline of the Empire and the decline of the Middle Class are basically the same thing. The grotesque income disparity we have today didn't get going only yesterday. The gap has been growing for nearly 30 years now. This graph represents only one piece of evidence supporting the view that the Empire's decline has been long term. There's evidence everywhere you look—if you look.

I hope I have established this point. You don't move from Stevie Wonder and Paul Simon (in the 1970s) to Justin Beiber and Lady Gaga (today) in just a few years. As Joe Bageant observed, music became marketing, and it takes a long time for that to happen. Few people notice the steady, gradual deterioration in standards and quality in music, film, economic conditions, education, infrastructure—you name it!

Why does the boiling frog story apply to people if not to actual frogs? The answer is simple. Human beings are built to adapt to new conditions. Generally speaking, they don't notice gradual change, they simply get used to it. People were designed by Nature to react quickly to sudden changes. They were not designed to notice that this year, and for many years before that, conditions got a little worse than they were the year before. Humans live in an eternal present. This observation is well-known to those who study such things. It is not original with me.

These simple points explain a lot if you know how to apply them. Let's get back to Krugman—

I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect — a year or more in the case of the economy, decades in the case of the planet — yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold...

To head off [a jobless recovery] — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.

Now, I ask you: how would another round of fiscal stimulus reverse and make right nearly 30 years of growing income inequality?  Obviously, it would not. Krugman's hidden assumption is that history doesn't matter, or only some history matters, but the rest of it—the part that really counts—doesn't exist. Everything will be OK if we throw another few trillion dollars at the problem now. Here's Krugman talking about boiling frogs, but he can't see the hot and warming water we're all sitting in. He's talking about future catastrophes but is not willing to consider the catastrophes that got us here in the first place. This is a perfect example of the futility of short-term thinking. It is also a perfect example of wishful thinking.

When I refer to the Empire's decline, it might be useful for you to remember that the owners of this country have been turning up the heat on you for decades now. Yet, most Americans act as though they were born yesterday. That's how Nature made them. America and the vast majority of its citizens are the metaphorical boiling frog. If you can still jump out the pot, do it now. I wish I could tell you exactly how to do that, but I can not.