Thursday, September 11, 2008

US Financial Independence, the Trade Gap, and Fannie and Freddie

Today's Buggy Subject

At Carpe Diem, a good libertarian economic web site --- yes, even for a decidedly non-libertarian like prof bug --- a thread was started by Prof. Mark Perry, who runs the site, on the recent strengthening of the US$ against a basket of other countries' currencies, each of them weighted by the importance of a country's trade with the US. Prof bug quickly posted a fairly lengthy commentary, which roamed widely over a variety of related subjects . . . some of them, as you'll see, no doubt surprising to most of you.

And as usual, prof bug tried to widen his economic comments to envelope some important political subjects, domestic and international alike. Click here for Prof. Perry's post and prof bug's wide ranging reply.

Is the Government Take-Over of Fannie and Freddie a Good Decision?

The buggy answer: Yes, and likely to have a fairly swift beneficial effect on the fortunes of the US economy. Click here for a perceptive analysis by a Wall Street specialist, who sets out the optimistic case, looks at pessimistic criticisms, and argues convincingly that the optimists are likely to prevail. By today, please note (September 11, 2008), we already know that the government take-over has lower mortgage rates back to where they were in April, and much lower than they were a year or so ago.

But will banks start lending to house-buyers even if more house-buyers line up and are qualified for the loans?

Almost certainly --- not least because Fannie and Freddie underwrite about half of the country's mortgages. Banks need to lend to make money. With the government behind the mortgage-market, they will very likely find that they need do only ordinary credit-analysis to find plenty of qualified buyers. Even in the greater Los Angeles area, house prices outside the city itself --- in surrounding suburbs --- have plunged to the point that housing sales have been up between 20% to 30% over a year ago.

Will the US Economy Stay Out of Recession?

Note that there is no official definition of a recession --- with the NBER, a private research group (National Bureau of Economic Research) using a variety of indicators, coming the closest in the US to an authoritative source on the subject. Its indicators cover numerous economic trends: not just GDP growth trends over three quarters or so, but changes in employment, per capita income, consumption, industrial production, retail sales, and so on. And it only voices its assessment at the end of those three quarters, retro-actively. Click here for a good, fairly up-to-date analysis that probes these trends in the US economy (late July 2008).

Right now, it's doubtful if we're in a recession --- unlike most of the EU or Japan . . . this, despite the growth of unemployment to around 6.1%.

Note though: that's a definition for many specialists of a "growth recession": GDP has grown, not dipped negatively for two quarters or so, but the growth hasn't been high enough to stop some lay-offs by businesses and to furnish jobs for new entrants into the labor market. Maybe so. It's not an encouraging sign, that's for sure.

Whether we fall into a full-fledged recession as defined eventually by the NBER hinges largely on two trends: on our trade balance --- the growth of exports (and a slowdown, if it occurs, in imports) --- and on a revival of the housing market, along with investment in export-oriented industries, and eventually, if we're lucky, a resumption of consumer confidence and buying and hence wider business investment across the economy. Then, too, if oil prices continue to fall --- today, they've dipped to just about $100 a barrel --- then we'll be doubly lucky: the value of imports will decline, consumers will find lower prices at the gasoline station, and the Federal Reserve will likely be more reassured about inflationary trends in the US economy . . . this, even though the core indexes it looks at (not least, core-CPI) exclude volatile food and energy prices as unreliable guides.

In that case, interest rates will likely stay low and help consumption and investment.

The Longer-Run Health and Future of Our Economy

So much for the short-run fortunes of the US economy.

In the long-run, as prof bug's comments at Carpe Diem today indicate, our economic future --- and our power, influence, and security in the world as a country --- will depend in no small part on our finding ways to become energy independent in the next decade or so.

If we could, then --- quite apart from reducing our dependence on vulnerable countries as sources of oil and helping our trade-balance --- we would stop fueling the aggressive behavior of Russia, the nuclear weapons programs of Iran, the Saudi export of Wahhabi extremist Islam, Venezuela's demagogy, and China's backing genocidal regimes in the Sudan and elsewhere that are engaged in something like mass-murder of minorities.

The Security Spillovers of Costly Oil: Ignored by 99.99% of Economists

All these countries (minus China) are basket-case economies, or would be without their huge oil imports.

And the future of our energy usage lies in electricity --- yes, even for vehicles . . . electricity itself able to be produced by a variety of energy sources, some of which can't be exported and hence would be shielded from the growing demand for energy resources by China and India: hydro-electric, wind-power, nuclear power, geo-thermo, and solar cells; plus eventually hydrogen.

For a while, in the transition, a growing use of natural gas (we have plenty as a country, and it is much more benign for the environment than oil) and domestic coal --- again, we're well endowed --- would be needed as well. And yes, coal can burn clean with proper existing technologies, plus sequestering its carbon dioxide . . . a technology that exists so far only on paper. It requires capturing the C02 and burying it deep underground or under the oceans.

Even the EU, observe carefully, has committed itself to building 50 new coke-burning power-sites in the near future. China, which is burning only dirty coal-generating power at about 550 electricity-generated sites, is building a new power-site a week. And though there's a commitment to building a new cleaner coal-power site that's under way right now, it appears that the Chinese government remains largely indifferent to the huge side-effects of massive smog and environmental deterioration.

Just Added Later in the Day: A Very Informative Read on Innovation

In the long run, a rich economy like the US's grows and stays at the forefront of the pack of advanced industrial and post-industrial economies largely and possibly only by means of major technological innovation . . . the biggest driving force behind continued improvements in productivity: whether labor, capital, or multifactor.

Multifactor productivity is, in economic modeling, the proxy variable for technological innovation (statistically speaking, it's the residual or error term in multi-regression modeling): and that's the case whether that innovation is embodied in new machines, new software, or just better knowledge in managing business firms. (To grasp the latter point, think, if you like, of better marketing or better ways to encourage the morale and cooperation of your work-force, across all sections of a firm . . . even a giant multinational.)

A good to-the-point survey of innovation and how it will likely continue to reshape and drive forward the US economy --- at any rate, if we continue to produce good knowledge-workers, spend on R&D effectively, encourage imaginative and well-educated students at all levels, and encourage as well close cooperation between university research, business firm research, and governmental research and support --- just appeared in the latest issue of BusinessWeek. The long article, which is also partly in video form, can be found here.

Revolutionary Technological Innovation Is Even More Demanding

As for radical technological innovation --- such as occurred in the last 35 years with computers and Information and Communications Technologies (and bio-tech) --- it requires something far more demanding, which the American people are especially good at: entirely new start-up firms, created by driven, risk-taking entrepreneurs who are zealously motivated to succeed whatever the risks and costs. And, once these new start-ups appear, they need to have capital and talented workers directed their way. As it happens, that requires Schumpeterian creative-destruction: the decline of older, more standardized industries, which frees up capital and talented workers at all levels to be invested in the growth of these new vanguard start-ups at the technological frontier.

In the process, the entire structure of the economy changes in revolutionary ways.

Want A Recent Example?

Consider this then: 75% of the existing Fortune 500 companies in the US by the late 1990s didn't even exist in 1975. By contrast, there were hardly any new successful companies in the equivalent Japanese or German ranks.

And if we're lucky, our next president and Congress will begin to shift regulatory, tax, and R&D policies toward the new frontier of radical alternative energies, with an eye for both economic and security reasons toward US energy independence . . . the challenges of achieving it seen as an opportunity, not just a costly endeavor, for economic renewal and foreign policy reasons.

And to that end, note that we are already heavily financing major breakthroughs in what is likely to be the most revolutionary technological change since the stone-age: nanotechnology . . . the ability to manipulate and change all materials at the molecular base. UC Santa Barbara, prof bug's former university until he retired, is at the forefront of such R&D. Together with UCLA, it has tapped several hundred million dollars from private industry to run a joint program at the UCSB campus.

One Other Huge American Advantage

Quite simply, no other work force in the advanced industrial countries approaches the American in flexibility, mobility, and optimism generally about change.

Historically, the roots of such remarkable flexibility go back to the nature of our immigrant country: it took courageous people --- hounded by poverty or religious or political persecution to leave Europe, Asia, the Carribean, and Mexico and seek a new life for al its hazards in the United States. That flexibility and optimism about change persist today. Our labor markets are markedly free of the kinds of official statist regulations and trade-union resistances that entangle labor markets in Japan and the EU.

Add in matchless entrepreneurial energies, start-up venture capital, an extraordinarily good R&D base, and cooperation between university, business, and government R&D --- and we are well situated, better than any other country, to continue pushing the technological frontier way into the future. On that technological frontier, new energy sources of a radical sort loom brightly . . . or they will if, with governmental encouragement, we can overcome the fossilized resistances of powerful special interests whose public relations stress all the dangers and costs of such a switch in our energy-base --- all the while ignoring the fact that right now the oil industry, the coal industry, the nuclear industry, and ethanol are heavily subsidized, while the international oil market is dominated by a cartel and its beneficiaries are actual or potential adversarial states.