Tuesday, October 5, 2010

Professor Laura Tyson seems very sensible ... and an economist!

Dear Colleagues

Professor Laura Tyson said a few words on Bloomberg TV on Tuesday (October 5). It was such a pleasure to hear someone articulate the economic issues with a very meaningful perspective ... and to get some talk going that went beyond the market movements today and the last few days. It was good to get beyond the knee-jerk one liners so beloved by many of those that populate Wall Street and its neighborhood.

This is a short presentation she made recently: http://www.cbpp.org/files/tyson.pdf

I have heard very little in the Bloomberg dialog around capital markets ... almost nothing ... about the substantive issues being faced by the larger population. Professor Tyson pointed out that since 2001 the balance sheet of most families in the country has deteriorated massively ... easy credit resulted in excessive borrowing. Now the families are doing all they can to get their financial situation sorted out. As a result aggregate demand which drives GDP and therefore also corporate and market performance is down and not about to rebound. Obviously this is not being helped by the general lack of employment growth and the lack of corporate commitment to putting people to work and investment.

Professor Tyson did not add my little factoid that building over-indebtedness of the family was encouraged simply because a lot of the corporate business world was making a lot of profit indulging in this nonsense. I have described this separately as the corporate sector profiting mightily while gutting the heart of America!

Getting aggregate demand to increase means getting people back to work. Professor Tyson called the excessive unemployment a huge hole in the US economy ... I think she said "a trillion dollar hole", which is substantial and important to address.

I argue that there are structural problems in the economic structure of the United States that have been aggravated hugely over the past ten years by the banking and finance sector, the capital markets and as well the Washington entities that have become huge components of the financial sector ... the Treasury, the Federal Reserve, enabling legislators, Fannie, Freddy and Sally Mae and regulators. Profits are made when unemployment is aggravated in the US and work is outsourced to India and China ... and taxation is avoided when profits "arise" on all sorts of little islands round the world and the moneys are not repatriated to the United States. No wonder governments have insufficient revenues to fund critical programs.

In the Bush Republican administration the corporate community prospered while workers in the country fared quite badly. Deficits soared and no effort whatsoever was made to get them under control ... regulation was "lite" and business abuse flourished. In the end there was a bubble burst that was felt everywhere on the planet. To his credit President Obama and a team of credible financial experts have pulled the financial sector back from "over the cliff" and there has been a surprisingly robust business performance in the USA by the corporate sector now for some 18 months. The bad news, the profits of the corporate sector have been high and the unemployment levels have remained high as well. Business has made its profits with fewer employees in the USA.

In turn this low level of employment is now impacting aggregate demand ... and business will soon be faced with more tough choices ... which could end up with a double dip outcome in Bloomberg speak!

A goal of TheBurgessMethod (TBM) is to have people talk about value as much as profit. High unemployment is a value destroyer! It is not as if there are not big "needs" in the USA ... catching up on deficits in infrastructure, rehabilitating the country's building stock to 2010 standards for energy use, sorting out the water needs of the country, upgrading health, upgrading education, retraining to rebuild human capacity, and so on. A whole lot to be done ... and neither the institutions nor the financing to set about getting these things done. If the capital markets really worked as the market advocates say, then there would be allocation of resources to all these things ... but they a financially sucking wind! With TBM type metrics maybe there would be a different market.

Professor Tyson was a breath of fresh air ... but there are hundreds of others who seem to think that what happened two years back was just a perfectly ordinary blip in the market. In my judgement, what happened two years ago was as near a calamity as anything in history ... and we are incredibly lucky to be where we are today ... and with the potential to be on track for a prosperous future. I cannot believe how many people want to get us back to the same old same old that created the calamitous situation in the first place.

I thought my memory was weak ... but by the standards of those who speak a lot on Bloomberg, my memory is pretty strong!

Very concerned

Peter Burgess

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