Planet at the Edge

Given the fact that small businesses employ about 50% of all US workers, the health of the small business sector is crucial to the sustainability of economic recovery in the US. Consider, for example, an index like small business average change in employment per firm. This index has dipped discernably about three or four times since the onset of the Great Recession. Further, it has been negative for most of the time since the beginning of the Great Recession.

Small businesses rely to a great extent on domestic spending. Whether that makes it more vulnerable than big businesses to housing sector collapses and financial sector collapses is an interesting question. This article is not intended to discuss the effect of sectoral collapses on the demand levels of firms. One probable reason for the persistent weakness in the small business sector is the difficulty of restarting closed small businesses ( considered in the aggregate ) or starting new kinds of small businesses in a high risk economic climate and in a situation of weakness in the demand side of the economy.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

There is a lot of confusing data and a lot of inaccurate claims about the US labor market and US unemployment in the public discourse. A lot of the discussion tries to paint a more optimistic picture about US unemployment and US economic recovery than what the data warrants. The US labor force participation rate has decreased by about 2% since before the onset of the Great Recession. This means the unemployment number would be higher by 2% compared to the current numbers if the labor force participation had remained at the pre-Great Recession levels. Moreover, the underemployment rate is at a high level of around 15% and can be expected to have an effect on the sustainability of the recovery from the Great Recession.

Those who want to stress spending cuts as the best way to reduce the US budget deficit should keep in mind that a private sector whose recovery from the Great Recession is not very solid will find it very difficult to absorb any job losses in the public sector due to government spending cuts. This should be considered along with other factors like the welfare aspects of government programs and the availability of good private sector alternatives to them.

The fact that GDP growth rate recovery from the Great Recession became delinked from job creation to a significant extent in the early stages of the recovery, similar to the recovery from the recession of the early 2000s, should be a matter of grave concern for those that care about the stability and the growth of the US economy. It is time to seriously examine and to question all claims about recovery in the US economy that neglect the employment aspect.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Can the American political system remain the American political system once it begins to become more serious about issues ? Take away catchy slogans like ” Compassionate Conservatism ” and ” Change - Yes We Can ” and Si Se Puede and all that and one gets a sense of how it must feel like in Beijing. Well, the slogans are not completely gone, but the mood has definitely changed. The sloganeering of the Romney campaign looks more rooted in issues - ” Smaller, Simpler, Smarter ” at least makes you think about government and the way government should work, whether you support his specific policies or not. The Obama campaign’s ” Forward ” slogan, while less catchy than the 2000 and 2004 slogans, continues the same kind of vagueness. Apparently, there is a Bruce Springsteen song called ” Forward - and Away We Go ” behind the Obama campaign slogan. If the lyrics I read on the internet are accurate, then this song seems to be preaching ( or at the very least endorsing ) a kind of obsession with amoral philandering or putting a spin on some serious immoral philandering, depending on who you are. This the US political discourse can best do without during such bad economic times, with waning power abroad and with uncertain prospects for the future. Will the political atmosphere in Washington feel more and more like the one in Beijing as the realization dawns that giving long and deep tax cuts and hoping everything will turn out fine or sending the US military on missions with unclear objectives and unclear moral justifications and hoping that it will improve US image or power or goodwill abroad does not work.

How do you inspire the public if you are a Democrat ? You talk about the middle class and the poor. You talk about fighting to change the tax code so that it is less skewed in favor of the rich. You talk about curbing the influence of the super-rich on legislation. Obama’s first term did not yield any good deals with the Republicans as far as taxes go. Paranoia about the effect of higher taxes led to extension of the Bush tax cuts. In such an environment, it is very difficult for an incumbent Democratic president to come up with campaigning strategies that enthuse the Democratic base ? Why do you expect your second term to be any different from your first term when it comes to taxes ? The fear of a double-dip recession is real and Republicans swear by ideology that favors lower taxes even when GDP growth is good ( although the scientific rationale behind this herd mentality is highly doubtful ). Also, Mr. Obama, why did you make the payroll tax cut into a bargaining item ? How do you enthuse the Democratic base after resorting to this kind of haphazard bargaining with Congressional Democrats ? During his first term as President, Obama has been anything but coherent on the tax question. His stances on taxes look more coherent now than towards the middle of his term. However, how do you convince the Congressional Republicans on the question of selective tax increases and tax decreases given the fact that you yourself went along with the continuation of the Bush tax cuts ? Should you promise tax increases when the recovery from the last recession is so weak and the job numbers are so alarming given the fact that you did not veto extension of Bush tax cuts that were passed using economic weakness as justification ? Mr. Obama, are you telling Americans and Democrats that you will veto any further extension of the Bush tax cuts ? If you are a Republican trying to enthuse voters about the economy, you sing the same old tune about the virtues of low taxes and how it spurs investment and growth. Unfortunately for Romney, a decade of Bush tax cuts hasn’t had a very positive effect on investment in the US or on the US economy overall. Looks like Romney wants to give more tax cuts to everyone. But this raises questions about what he will do about the deficit. Talking about huge spending cuts is okay. However, he would do well to remember that when the Republicans had the White House and the Congress for several years during the Bush presidency, they could not cut spending. And if he wants to cut deficits purely through spending cuts, he needs to explain which items he will cut. Will he go with large defense budget cuts ? Are there good, credible, non-risky private sector alternatives for the government programs he may want to cut ?

After fighting two costly wars with very questionable benefits to the country, the US finds itself in a position where its military and geostrategic activities are being met with serious opposition or outright hostility. With the continuation of economic sluggishness, the ability of the US to project its power abroad has decreased drastically. America’s rhetoric about being the champion of democracy around the world is being met with more skepticism. The process of reducing American troops in Iraq and Afghanistan is already underway. Generating partisan debates on foreign policy questions becomes difficult in these circumstances.

” Green jobs ” was a big cathphrase of the 2008 elections. The Romney campaign website mentions that he will try to make the US energy independent by 2020. Americans should be skeptical about the achievability of energy independence by 2020. As for the effect on the overall economy, any new green jobs will replace conventional jobs, new green investment means less non-green investment etc. So, the Green economy thing is more about sustainability and resource independence and less about overall job creation. It depends a lot on how fast the scientific and research establishment, public and private, is able to come up with good solutions and cheap alternatives. It probably calls for a Beijing-style approach rather than a Washington-style approach.

China bashing has been resorted to by both Romney and Obama at one time or the other. However, calling China a currency manipulator misses the point. Low wages and other structural factors figure prominently in why China is exporting so much to the US. Different countries try to keep their currencies low or high depending on their economci needs and circumstances. It is wrong to give false hopes to the public on this question without paying serious thought to the complex economics involved.

It may be a good thing after all that Americans will have to pay more attention to facts and issues rather than gimmicks while deciding their president this time around.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Browse the internet and you will find some interesting analyses about US, European and OECD corporate tax rates. The big question that arises in my mind when I study these analyses is this - who does rich America belong to, if not to America ? Once one considers tax loopholes, top American multinational corporations are paying lower taxes overall compared to their European counterparts. Now, corporate taxes do not form the largest component of tax revenues in the US, income taxes do. Still, when fiscal deficits are such a big problem, all the revenue sources need to be considered as regards their costs and benefits.

So, what should be the priority if one is trying to frame the right corporate tax policy for the US ? Should closing tax loopholes take priority ? Or should changing corporate tax rates take priority ? Corporations are already taking advantage of loopholes like tax havens and lowering corporate tax rates is unlikely to make them stop using these loopholes. As for the extra share of the profits they will retain if corporate tax rates are decreased, will it lead to increased investment in the US and will it be investment of a type that creates a lot of jobs ? Given their propensity to move production to low-wage countries and to countries with fewer environmental restrictions, and given the recent tendency of US financial institutions to invest money in risky, high-expected-return foreign assets, one should be pessimistic about the ability of lower corporate taxes to yield overall economic benefits for America. In fact, it may just end up lowering US corporate tax revenues without doing anything positive on the investment or job creation front. Therefore, closing of corporate tax loopholes looks like a better option for US policy makers. Structural factors like wages and other costs will figure prominently in the investment decisions of American corporations and tax rate changes that are unaccompanied by tax code changes designed to close corporate tax loopholes will most likely affect the revenue from corporate taxes and not achieve anything in the growth or jobs areas.

Now let’s dwell on income taxes and rich America for a moment, shall we ? Rich America got income tax sops, thanks to the G.W.Bush Republican wave. I mean these weren’t gigantic sops, if one goes by percentage changes etc. However, these cuts were large enough to increase deficits to an extent that exacerbated the debt problem so that now, the debt projections to 2025 or thereabouts look quite alarming. And what about jobs ? We had a long jobless recovery phase after the recession of the early 2000s. We now have one of the worst, if not the worst, job scenarios since the Great Depression. And what about social insurance ? Not impressive, if one compares to many European countries, for example. And where has the money from the lower taxes gone ? A lot of it has found its way to risky investments abroad through US financial institutions.

As rich Americans try to use their influence on the political establishment to bring about decreases in taxes or to extend previous tax cuts, and as they become more and more global in their approach towards investment and money-making, there is a high chance that these Americans will be less economically integrated with the society they are part of. Mr. J.K. Galbraith used the term ” Affluent Society ” to describe the rich about fifty years ago. In the early twenty-first century, should we start using the term ” Ostensible Americans ” to describe the new ultra-globalized rich Americans ? It has been quite a journey in elitism in the world’s biggest economy from Mr. Galbraith’s Affluent Society to the new ultra-globalized American elite. Not that globalization is bad per se. Not that rich Americans should forego good business opportunities abroad. But there need to be limits to how much rich Americans are allowed to avoid their share of the responsibility for fixing the country’s finances while pursuing risky investments abroad. And it is also time to start thinking seriously about the limits to which businesses can be allowed to flee abroad in search of low wage rates etc. In other words, it is time to realize that the Americans with money to invest are not just competitors with the Europeans and the Japanese and the Chinese. They are Americans with responsibilities inside America. GDP growth without good job growth should lead to serious introspection in the country as to its long-term effects on American society. It is time to halt the slide towards ostensible Americanism.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Gross Domestic Product and the growth rates of Gross Domestic Product do not tell the whole story about any economy. However, they are two parameters that get a lot of attention both in the news media and among economists and economic analysts. Japan has slid behind China in terms of annual GDP over the last two decades and its growth rate has languished. As we look forward to the next decade or so, will the American economy start resembling the Japanese economy in many ways ? Let’s look at some similarities. Japan has a very high public debt to GDP ratio, around 200%. The US public debt to GDP ratio is around 100% and may well reach the kind of level Japan has now in another decade, even if the US Congress succeeds in cutting the annual budget deficit to around 0.6 trillion from the current deficit of more than a trillion. Low taxes failed to spur Japanese GDP growth to the extent the Japanese policy framers wanted and Japan has recently decided to pay more attention to its spiralling debt to GDP ratio. The US obsession with low taxes is producing consequences that are similar to Japan. The GDP growth numbers have been either bad or unimpressive. What makes it worse is the fact that whatever GDP recovery has happened recently has not led to good net job growth rate in the US. Large government budget deficits tend to create pressure on the current account and the trade balance of a country. Japan was a strong net exporter. However, its trade balance has come under pressure recently and its large government budget deficit may well be a major contributing factor. The US has been a net importer and persistence of the government deficit will keep creating pressure on this front. As the composition of Chinese economic production and the composition of China’s exports and imports change in the coming years, the export and import numbers of the United States and some other countries may see a lot of changes. One needs to keep in mind the fact that both the export and import amounts and the trade deficit matters. The sustainability of the US trade deficit and current account deficit depends on the willingness of non-US entities to buy US assets. Unimpressive GDP growth rates, crises in financial institutions, unsteady corporate profits and vulnerable public finances do not create the right conditions for the inflow of foreign money into the US. While Japan has avoided some of these problems due to its strong export strength in the past, it may also start encountering some of the problems that the US has been having.

In other words, the US and Japan have a lot to learn from each other’s economic experiences. How these two countries tackle the problems of high public debt to GDP ratios, pressure on trade balances and current account balances, reliance on foreign money and the contradictions between reliance on foreign money and unimpressive economic performance at home will affect the future economic trajectories, not just of these two countries, but also the economic future of the world.

A few crucial things need to be kept in mind while comparing Japanese economic problems with similar economic problems in the US.

1. Japanese net public debt is around 110% of GDP, much lower than its gross public debt of around 200% of GDP. The percentage difference between gross and net public debt of the US is not that high. So, among very big economies, as opposed to smaller European countries, the US may well have the most serious public debt problem, even more serious than Japan, as we speak.

2. Only 6% of Japanese public debt is in foreign hands. On the other hand, China owns about a trillion dollars worth of US treasury bonds and Japan about 1 trillion dollars worth.

3. The unemployment rate in Japan is around 4.5%, which is much lower than the current US unemployment rate of around 8%. This has implications not just for policies designed to promote higher GDP growth etc, but also for public finance. The need to bring unemployment numbers down and the need to keep fiscal deficits under control will create tensions in the fiscal policy area.

4. Poverty rates in the US and Japan are similar if one goes by the criteria used in the respective countries. However, the fact that this poverty is accompanied by much higher unemployment in the US means that it becomes much more difficult to come up with policies designed to keep both low while ensuring public fiscal stability.

5. The current account deficit of the United States is sustainable only if private and government entities in the US keep attracting enough foreign money. The United States is likely to face bigger problems in this area than Japan in the near future.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Economists and politicians who favor tax cuts as growth-promoting measures have some explaining to do if one considers recent investment numbers as a percentage of GDP in the United States. They are low, probably lower than 15% of GDP. And aren’t low taxes supposed to spur GDP growth through higher investment, among other things ? So why is the investment sentiment so anemic and why is the investment climate so negative ? American financial institutions have been investing funds abroad in hopes of high returns. They got burned in France and in other European countries recently and they got burned in East Asia about 15 years ago. But do you see what I am getting at here ? American business and financial entities aren’t really enthused about investing at home ! And this ten years after a big, elitist tax cut. I mean there seems to be a serious lack of scholarship and awareness about the tax-growth question. How has investment as a percentage of GDP been so low during a prolonged low-tax period ? Have rich Americans run out of good options ? I mean, come on, rich Americans ! We are counting on you to pull us through this morass, through this troubled climate. I mean, the CEOs are earning their millions, right ? And corporate profits aren’t really all that low, are they ? Where are the new investment ideas and why aren’t American business and financial entities investing more at home ?

Is it just due to business sentiment and investment sentiment or is it due to a strong global pull on available money or is it due to structural factors ? So, the housing market collapsed and isn’t a good investment option for some time. And a lot of low-end manufacturing is shipped overseas. And automation is becoming more prevalent in manufacturing ( this has implications for the employment generation capability of investment and employment generation is crucial for the US right now ). So, is it all up to the service sector in the United States and has the business community in the United States run out of ideas when it comes to new investment in the service sector ? How does the US economy improve investment prospects in the service sector in a way that creates a lot of jobs, which America needs right now ? Should the Congress seriously start considering taxing large investments made abroad by US businesses and US financial institutions ? Or pass legislation that mandates a portion of such investments made abroad to be contributed to workers training and retraining programs in the US ? And who will come up with the training and retraining programs that ensure that the employment market does not get into frequent or prolonged traffic snarls in the US ? These are all questions that need careful consideration if the economic challenges facing the United States are to be solved in a way that leads to sustainable economic recovery.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )