Obama's Economy

the inevitable decline of America in 2010?

Subprime victims, broken war veterans, federal debt spiralling out of control, rising geopolitical influence of China, neverending wave of bankruptcies, downsizing and outsourcing of US jobs, fallen sports idols (Tiger Woods etc…)

For starters, to say that a decline is inevitable is ridiculous, however, there are reasons to believe that America will face challenges and could decline in the future.

Right now we are facing a large amount of uncertainty, meaning that while things can definitely get better and even if they likely will, there is very little way to know for sure if we will and even if we do how long it will be before we do. With that said, the data does show some green shoots and that the future is not going to be that bad, but the evidence also indicates that it may not be that good either.

Subprime mortgages – for starters, this needs to be regulated. The truth is, while technically the buyer could have made a prudent decision based on the agreement, but there are two reasons this doesn’t make sense. For starters, lets say the borrower understood the risks of the mortgage, at the time there may have been no reason for this person to believe that they would see a sizeable decline in home equity or a loss of income rendering them unable to pay. Many of the foreclosures were not necessarily subprime and even the ones that were occurred because of job losses or rates resetting etc. In other cases people were just ripped off and lied to and the borrowers never read the fine print but trusted the salesman. This is a problem because this destroys trust which makes people less likely to consume, hence a weaker economy. With that said, banks are more prudent now and will be for sometime. While I think the risk they will return to previous practices soon low, without regulation, overtime they will.

Yes, the war veterans need better treatment and yes the wars could have been managed better. The good news is that conditions in Iraq are improving and actually for the first time in Afghanistan we are seeing improvements. When we first went, Bush and Rumsfeld wanted things done on the cheap making this actually more costly in the long-run. Whether you support these actions or not, it does appear that these may turn out to be positive for the world in the long-run. This doesn’t mean this should be the future policy of the US, but it may not turn out as bad as it could.

For starters, during a recession debt will always grow and trying to eliminate this debt would likely cost us more in the long-run. It is more important to focus on growth by restimulating aggregate demand. First off, about half of our debt is actually owed to ourselves either the fed or other government agencies. While overtime, if we do nothing this portion will gradually get smaller, we are not in a bad financial position, although it really could have been better if we actually tried to fund the two wars and the Medicare Part D expansion. Relative to the size of our economy, our debt is still less than our GDP, while countries like Japan have ratios of over 200%, yet show little risk of default. While these deficits are a clear problem in the future since they run the risk of crowding out needed expenditures, there are many ways to solving this. For example, taxes on the wealthiest are very low. Raising these can really make a dent. This isn’t a class warfare argument, but just practically. There is no way the middle class alone can repay this back. Furthermore, our current debt level technically never has to be repaid back. In fact, if we kept it the same, our economy would grow making it manageable. The problem is with some of our social programs such as social security and medicare, these deficits are likely to grow and outpace revenue growth, making outgrowing the problem the only answer, but there are ways this can be made to happen.

China is growing, and they will be more influential in the future, however, this should not come as a surprise as they have over a billion people. With that said they are very dependent on us. While they own a large share of our debt, they really don’t control us the same way most lenders control their customers since they peg their currency to the dollar and the fact that they depend heavily on the interest payments as a steady stream of income. Furthermore, since their economy is so heavily export driven, not buying our paper would reduce that export driven income. We need a more rational relationship with China because we are running trade account deficits with them to epic proportions and these are not good for either party since it makes the nature of our trade extremely unstable. With that said, because we have such a solid service sector, China will be hurt but a breakdown much more than us, but it will still hurt for us.

Outsourcing alone is never bad, but we are not managing it well. Outsourcing helps improve productivity and generate wealth which in turns frees up capital for other things. Nevertheless, capital is just not being distributed as efficiently as it could be through our economy which is why the service level jobs that are competitive and easily replicated pay less

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