Monthly Archives: December 2009

Sustainable Prosperity

One of the terms that I frequently mention is “Sustainable Prosperity.”  I think the term and its meaning have tremendous significance to our economic future at this juncture.

Providing an exact definition for the term is difficult due to the complexity of the underlying concepts.

“Sustainable” can be defined in terms of time, as well as continuity.  If a posititive economic trend exists for a few years, can it be termed ‘sustainable’?  Case in point was the housing bubble.  Most would say it lasted between 5 to 10 years.  The economy certainly benefitted from it.  However, the benefit was not sustainable.  In fact, in its wake, it has caused an immense amount of damage and poses a tremendous ongoing threat.

From a continuity standpoint, in order for growth to be sustainable it has to be resistant to severe economic setbacks.  Of course, history has shown that recessions, panics, and the occasional depressions are inherent in the economic cycle.  However, if economic growth is sustainable in nature it should over the course of time be able to recover “lost ground” and attain new highs.

The concept of “Prosperity” is somewhat difficult to define as well.  I like to think of it as being multifaceted and having deep “breadth.”  Of particular concern should be enrichment that is narrowly achieved, i.e. a large amount of the nation’s prosperity concentrated in the hands of a few.  This is a concern from both a societal and economic standpoint.  Strong, vibrant, and sustainable economies have widespread prosperity.

Other aspects of “Prosperity” is the amount and composition of such.  If median household income is growing at a rate greater than inflation, can that be termed prosperity?  Can prosperity be defined in GDP growth?  Or is prosperity a more general term that encompasses such concepts as standard of living, the ability for the masses to have affordable access to healthcare, higher education, etc.?

As aforementioned, I believe that the concept of Sustainable Prosperity is more important now than ever before.  If one assumes, as per the current economic consensus, that we are experiencing economic recovery, I think it would behoove us to constantly assess whether we are experiencing true “Sustainable Prosperity” or something that might only resemble such.

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An Interesting Letter Regarding Economic Systems

Below is an excerpt from a  reader’s letter found in The University of Chicago Magazine, Nov-Dec 2009 p. 10-11.  It is from Frank R. Tangherlini.  I found the ideas he presents to be interesting and notable:

http://magazine.uchicago.edu/0912/every_issue/letters.shtml

“Second was Michael Fitzgerald’s article on the Chicago School and the economy…my experiences as a youngster during the Depression of the Thirties have left an imprint on my thinking about economics, which is why I noticed a glaring omission in the exchanges and comments of these distinguished economists: their failure to empathize with the hardships experienced by average folks because of the severe economic downturn, such as described in the article by Lydialyle Gibson, “On the Line.”

There have been millions of workers who have been laid off in the past few years, who are now living in straightened circumstances, not because of poor performance on their part, but rather because of the poor performance of the market system. Indeed, one reads in Gibson’s article, “‘It’s less and less uncommon,’ says Kathy Donahue, Catholic Charities’ director of programs, ‘to find working people among those in line for a hot meal.’” The basic problem is that the system of economics that informs the thinking of many economists tends to maximize the wealth of a relatively small number of people, without imposing the constraint of requiring the simultaneous well-being of the average citizen, including a substantial reduction and eventual elimination of those below the poverty level, as well as a significant reduction of those in prison. This social constraint is what government is intended to bring about, i.e., “to provide for the general welfare,” as stated in the Preamble to the Constitution. Not placing sufficient emphasis on this fundamental injunction is the basic flaw in the Chicago School of Economics and our present system of capitalism more generally. Unless one admits this and redesigns one’s approach to economics, this tragic situation will reoccur over and over again, eventually, alas, bringing down our nation.

Frank R. Tangherlini, SM’52
San Diego

_____

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Larry Summers On Growth – March 13 2009 Speech

Here is one more excerpt from Larry Summers’ speech of March 13.  I find this excerpt to be of particular significance with regard to the concept of Sustainable Prosperity:

http://www.brookings.edu/events/2009/0313_summers.aspx

“Of fundamental importance is ensuring that we do not exchange a painful recession for another unsustainable expansion. That would not only be irresponsible – it would be counterproductive. We have seen what happens when we pursue policies that produce short-term, instead of durable and sustainable growth.”

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Fannie Mae And Freddie Mac Developments Of December 24

For those who may have missed it, there was a notable development on December 24 concerning Fannie Mae and Freddie Mac.  Here is The Wall Street Journal link and the Treasury Dept link:

http://www.ustreas.gov/press/releases/2009122415345924543.htm

http://online.wsj.com/article/SB126168307200704747.html

Basically the government announced plans to cover an unlimited amount of losses at both companies.

It is yet another testament to the extent of intervention in the real estate markets.

I think this “blank check” approach carries many risks.  A while back I wrote an article about how interventions could be effectively managed.  The article is not intended to condone or support the concept of interventions.  However, there should be a regimented approach to their administration.  These interventions carry a tremendous amount of risk, aside from the substantial amounts of money being expended.  Here is the link (it is also listed among the articles on the right-hand side of the home page):

https://www.economicgreenfield.com/prosperitybypencom-directory/business-planning-principles-applied-to-the-stimulus-intervention-efforts/

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Article On Detroit Unemployment

Below  is an article from The Detroit News of December 16 titled “Nearly half of Detroit’s workers are unemployed”. 

Among other things, Detroit’s economic situation seems to refute the theory, with which I vehemently disagree, that we as a nation do not “need” manufacturing in order to be successful.

http://detnews.com/article/20091216/METRO01/912160374

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Larry Summers On Bubbles – March 13 2009 Speech

As I, as well as others, have been frequently mentioning bubbles, I thought it would be interesting to post a few comments (excerpts) that Larry Summers made concerning their effects during his March 13, 2009 speech.  I found these comments to be very interesting, especially in light of our current economic condition and prospects for Sustainable Prosperity.

Here is a link to that speech, which was made to The Brookings Institution:

http://www.brookings.edu/events/2009/0313_summers.aspx

 

“Our single most important priority is bringing about economic recovery and ensuring that the next economic expansion, unlike it’s predecessors, is fundamentally sound and not driven by financial excess.
This is essential. Without robust and sustained economic expansion, we will not achieve any other national goal. We will not be able to project strength globally or reduce poverty locally. We will not be able to expand access to higher education or affordable health care. We will not be able to raise incomes for middle class families or create opportunities for new small businesses to thrive.”
later:
“We have seen housing prices reach unsustainably high levels and credit spreads reach unsustainably low levels in the middle of this decade. And we saw bubbles in technology in the late 1990s.
Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not. And, it is not entirely healthy even while it lasts.” 
later:
“If growth in the coming years is not to be driven by asset price inflation-induced consumption, other engines of growth must be identified. These forms of growth should be sustainable and shared by the majority of American households.” 
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Total Household Net Worth As Percent Of GDP

The following chart is from the CalculatedRisk Blog on December 13 http://www.calculatedriskblog.com/

and depicts Total Household Net Worth as a Percent of GDP.  The underlying data is from the Federal Reserve Flow of Funds 3Q 2009 report.

I am posting it here for reference purposes, and I might comment upon it in the future.  I find it to be a very interesting chart.

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Stiglitz On 2010

Here is a story from yesterday on comments by Joseph Stiglitz about his views on 2010 economic performance:

From the article: “Nobel Prize-winning economist Joseph Stiglitz warned there’s a “significant” chance the U.S. economy will contract in the second half of next year…”

I find Stiglitz’s view significant because it is in marked contrast to that of the 2010 economic consensus among mainstream economists.

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Banker Pay

Recently, both President Obama and Treasury Secretary Geithner have bemoaned the banker pay issue. 

Here is a Wall Street Journal story of December 14 containing President Obama’s comments on the issue, which contains his “fat cat” quote:

http://online.wsj.com/article/SB126073152465089651.html

Here is a Bloomberg article of December 5 that mentions Treasury Secretary Geithner’s comments:

What I find notable about President Obama’s and Treasury Secretary Geithner’s utterances on the subject is that of all the people that could potentially change the situation regarding banker pay, these two are probably most foremost.  For them to simply bemoan the situation, when they are the most empowered to act upon rectifying it, seems odd.

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“Too Big To Fail”

The term “Too Big To Fail” is heard frequently. 

However, for all of the talk regarding its danger, very little if anything has been done to rectify the condition. 

As seen in The Wall Street Journal of December 16, p C18, “The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector’s total.  In 2000, the top four’s $2 trillion of assets accounted for 35% of the total.”

“Too Big To Fail” has many adverse consequences.  Perhaps the most serious is that it potentially fuels moral hazard.

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