Saturday, September 26, 2009

Green Shoots

As has been expected this prolonged period of economic decline has been the most severe and the longest downturn in the last 80 years. Unemployment is approaching 10 %, the Federal deficit is setting new records and so is the projected national debt. But many economists, including Mr. Bernanke of the Federal Reserves have been talking increasingly about “green shoots”.
The fact of the matter is that there have been many “green shoots” sightings but most have proven to be almost as elusive as the UFO variety. Although home sales of both existing and new homes have been on the increase for a few months they seem to have stalled during August and durable good orders were below expectations. Add to the above the fear generated from what are the long run implications of the massive amounts of money that has been printed (read inflation and weak dollar) and the high prospects for a jobless slow rebound and the greenness of these shoots start to pale. They are not dead yet but the short term expectations should be tempered until the quality of the “sighting” improve.

I would be interested in your opinion of the movie "Capitalism: A Love Story" if you have seen it.

Sunday, September 20, 2009

Would You Buy American Iron?

As difficult as it might be to believe,at one time, American made cars used to account for over 90% of the cars on the road in the US of A. Actually at times, GM's share alone was close to 60%. Fast forward to last year when GM and Chrysler filed for bankruptcy under chapter 11 and were able to avoid liquidation only with massive help from the federal government. Ford fared better but could not avoid receiving some major body blows that left it gasping for air.

Most analysts seem to think that Ford has learned its expensive lesson and is on the road to recovery but the jury is still out regarding the prospects for GM and Chrysler. Many think that GM will survive and possibly prosper but as a much smaller company than it used to be. GM had to shed Saab, Hummer, Pontiac, Saturn and they had to sell their stake in Suzuki and most of Opel. Chrysler on the other hand is eliminating marginal models such as the Pacifica and the Viper. The real question is whether GM and Chrysler will survive or whether all the tens of billions of dollars spent by the feds were for naught.
The next two years will be instrumental to the industry. Ford is planning to become profitable late next year or by early 2011 by the latest as a result of its new line of cars. GM hopes to break even when the market for new cars climbs back to 11.5 million units a year. They are hoping to ride the buz from from the plug in Volt next year while Chrysler is counting on the Fiat cars that could start appearing in the show rooms in a year from now.

A quick review of some of car magazines and car reviewers for the new model year seems to show that the American car companies have a fighting chance. Four of the most important new cars are :

Buick Lacrosse

Ford Taurus especially the SHO

Ford Fusion Hybrid

Chevrolet Equinox

Have you looked at any of these models and if so would you buy any of them? It is going to be your purchasing habit that will decide the fate of Detroit over the next 3-5 years. What do you think, would any or all of the 3 American car manufacturers survive and prosper?

Tuesday, September 15, 2009

It Is Time To End GDP Fetishism

Most common discussions, by all kinds of media outlets all over the world, of the concept of social welfare of a particular society never fail to mention the state of the Gross Domestic Product, the GDP. This all popular macroeconomic variable has grown, despite its enormous shortcomings, to become a metric of what it was not designed to be in the first place. Very simply stated, the GDP is a money measure of the value of final goods and services that are produced by a particular society. Note that the concept does not pretend to say anything about the level of welfare but is only the summation of all what is produced without even deducting the damage that ensue from such levels of production and consumption . A simple common example might help illustrate this absurdity. If during a particular year, the number of expensive medical procedures undertaken in a state increases then the overall size of its GDP increases also. So if the GDP is such a good indicator of the social level of welfare then why not promote cigarette smoking in order to increase the incidence of lung cancer which will keep the surgeons busy and lead to a large rate of growth in the GDP? Of course such a policy would be rejected by all. But isn’t this exactly what we do when we allow firms to dump their toxic wastes into rivers and when we encourage workers to commute long distances from where they reside to their place of work. The concept is rife with problems that are too many to list and that economists and environmentalists have been pointing out for decades chief among them is the inability of GDP per capita to say anything about the all important income distribution. Wouldn’t it be more important to learn who had access to the increased output rather than to just say that output went up? It has often been the case that the all the growth in the GDP accrues to a small group of privileged economic class when ¾ of the population has in reality lost ground.
Environmentalists in general and environmental economists in particular have been in the forefront of an unremitting attack on the method of assembling national income statistics and in particular the GDP. These efforts have been helped over two decades ago by the work of Amartya Sen, the Noble laureate in Economics, through his pioneering work on how to measure poverty and social well being. His work has led, among other things, to the increasingly popular Human Development Index by the United Nations. The HDI ranks countries by creating an index that takes into consideration the level of GDP per capita but combines that with measures of literacy and life expectancy. As a result it becomes possible to rank a country with high literacy rate and a high life expectancy above one that enjoys a higher GDP per capita but lags in the other two indicators.
Two days ago Joseph Stiglitz, another Noble laureate in Economics, a Professor of Economics at Columbia University and an ex Chief Economist of the world Bank has joined ranks with the above group of advocates for a change in National Income Accounting. He called, in his capacity as a member of a group advising president Sarkozy of France, upon world economic leaders to “avoid GDP fetishism and… to stay away from that.” What a welcome message during these perilous economic times in a world that is clearly not sustainable. Bravo Dr. Stiglitz.
So what are the implications of such a change? You tell me. Is a growing GDP, accompanied by a growing poverty rate, inequitable distribution of income , larger public debt, higher unemployment, less electric power, a construction boom for the super wealthy, privatized public beaches, low minimum wage, environmental degradation in all fields and rampant corruption a sign of social justice and better social welfare?

Sunday, September 13, 2009

Latest Income Statistics

The following are some of the highlights from the most recent study released by the US Census:

Real median household income fell between 2007 and 2008,and the decline was widespread.
Median income fell for family and nonfamily households, native- and foreign-born households, households in 3 of the 4 regions, and households of each race category and those of Hispanic origin. These declines in income coincide with the recession that started in December 2007.

The poverty rate increased between 2007 and 2008.

The percentage of uninsured in 2008 was not statistically different from 2007, while the number of uninsured increased between 2007 and 2008.

These results, though widespread, were not uniform across groups. For example, between 2007 and 2008, real median income was statistically unchanged for households maintained
by a person 65 years old and over but declined for households maintained
by people of all other age group categories. Additionally, the poverty rate increased for children under 18 and for people 18 to 64 but remained statistically
unchanged for people 65 and over.

Income Distribution

The lowest quintile of households had incomes of $20,712 or less; those in the second quintile had incomes of $20,713 to $39,000; those in the third quintile had incomes of $39,001 to $62,725; those in the fourth quintile had incomes of $62,726 to $100,240;
and those in the highest quintile had incomes of $100,241or more.

It is safe to assume that the data for 2009 would show the same trend i.e. a drop in median income and an increase in the poverty rate. Some even fear that the jobless recovery might even be with us at least for a portion of 2010.