3rd world USA

I've been reading too many articles lately (Newsweek, Salon, Downside.com, etc) that keep saying there's no end in sight to the economic downturn of the US, and some even say you're headed straight for a 3rd world style economy(Like I mentioned months ago).

I saw a comment on slashdot today that sums most of this :

http://slashdot.org/comments.pl?sid=...

I'm on record [downside.com] as having predicted the dot-com collapse and named which companies were going to tank and when. It was blindingly obvious if you knew any economic history.

We're still in very bad shape.
*Personal bankruptcies are up, way up. More people will go bankrupt this year than will graduate from college.
*The stock market is still far overpriced, by a factor of 2 to 3, based on historical price/earnings ratios. There isn't going to be a stock market recovery. Look at Japan. The bubble there peaked in 1989 and still hasn't recovered. It was at 39,000 then; it's around 10,000 now, fourteen years later.

*Manufacturing is only 12% of US employment. That number was 16% a decade ago, and around 35-40% half a century ago. Most of the high-paying jobs for low-skill people are in manufacturing. That's where the good working-class jobs went. Any job that involves large numbers of people doing the same thing repeatedly under direct supervision in a fixed location is a prime candidate for automation. Most of those jobs have already been automated. Technology continues to push manufacturing employment down.

*Median income per hour worked in the US peaked in 1973. Yes. 1973. Best year ever for the working class. For thirty years, things have been getting worse. Slowly enough that there haven't been riots.

*30 years ago, housing ate up about a quarter of income. Now, it eats up about half. And not because the housing is better.

*Schooling is far more expensive than it used to be. The decline in the public school system means that people go to great lengths to move to areas with better schools, or put their kids in private schools. This is part of the driver behind housing costs. Higher education is also far more expensive, and less subsidized.

*The "race for the bottom" effect dominates public policy. Jurisdictions compete to offer lower taxes, and even lower wages.

*From a pure economic perspective, workers should be paid just enough to keep them alive and working. That's where we were around 1850 or so, and that's where we're going today. Most of the world lives just above the survival level. The Western world avoided that for much of a century, but now it's coming back.

*Technology won't help. This is a fundamental result of unrestrained capitalism. Increased productivity does not inherently increase wages. In a free market, wages will decline as productivity improves, because the labor pool will become bigger as more people are unemployed. Total buying power doesn't increase unless wages do, so there isn't inherently a market for more stuff. An economy with a big pool of permanently unemployed or underemployed people dragging wages down is economically stable. Most of the third world is stuck in that mode. THe US is headed there.

Anyone have any reasons to counter this? Some optimism wouldn't hurt.

"Mex" wrote:

Anyone have any reasons to counter this? Some optimism wouldn''t hurt. :shock:

Well, far be it from me to give ammo to the Administration, but here are a few places where he got it wrong.

I''m on record [downside.com] as having predicted the dot-com collapse and named which companies were going to tank and when. It was blindingly obvious if you knew any economic history.

Any idiot could have predicted a downward shift in the economy eventually. It''s the fundamental truth of economics.

We''re still in very bad shape.

Debateable, as you''ll see here.

*Personal bankruptcies are up, way up. More people will go bankrupt this year than will graduate from college.

This is a result of poor personal choices in consumer spending, not of any government policy. You could blame Dubya for just about anything, just not this.

*The stock market is still far overpriced, by a factor of 2 to 3, based on historical price/earnings ratios. There isn''t going to be a stock market recovery. Look at Japan. The bubble there peaked in 1989 and still hasn''t recovered. It was at 39,000 then; it''s around 10,000 now, fourteen years later.

Now here is where he might have a point. One of the Administration''s (and their backers) criticism of the ""Clinton Economic Boom"" was that stocks were grossly overpriced. If that is still true, it''s still a long way to go to the bottom.

*Manufacturing is only 12% of US employment. That number was 16% a decade ago, and around 35-40% half a century ago. Most of the high-paying jobs for low-skill people are in manufacturing. That''s where the good working-class jobs went. Any job that involves large numbers of people doing the same thing repeatedly under direct supervision in a fixed location is a prime candidate for automation. Most of those jobs have already been automated. Technology continues to push manufacturing employment down.

What he fails to mention is that with manufacturing dropping off, the US is turning towards a more service-based economy. Not that that little nugget would matter to workers being let go even still, but I digress...

*Median income per hour worked in the US peaked in 1973. Yes. 1973. Best year ever for the working class. For thirty years, things have been getting worse. Slowly enough that there haven''t been riots.

He should have stopped at the first sentence.

*30 years ago, housing ate up about a quarter of income. Now, it eats up about half. And not because the housing is better.

And again, he should have let that fact speak for itself. Housing costs are rising. Even during the recession, home prices continued to soar.

*Schooling is far more expensive than it used to be. The decline in the public school system means that people go to great lengths to move to areas with better schools, or put their kids in private schools. This is part of the driver behind housing costs. Higher education is also far more expensive, and less subsidized.

Well, that''s hard to argue with. Then again, more people are sending their kids to college. That''ll hit the wallet a little.

*The ""race for the bottom"" effect dominates public policy. Jurisdictions compete to offer lower taxes, and even lower wages.

What''s the point of this statement?

*From a pure economic perspective, workers should be paid just enough to keep them alive and working. That''s where we were around 1850 or so, and that''s where we''re going today. Most of the world lives just above the survival level. The Western world avoided that for much of a century, but now it''s coming back.

Proof?

*Technology won''t help. This is a fundamental result of unrestrained capitalism. Increased productivity does not inherently increase wages. In a free market, wages will decline as productivity improves, because the labor pool will become bigger as more people are unemployed. Total buying power doesn''t increase unless wages do, so there isn''t inherently a market for more stuff. An economy with a big pool of permanently unemployed or underemployed people dragging wages down is economically stable. Most of the third world is stuck in that mode. THe US is headed there.

Now here''s the most relevant point. Unfortunately, he is using very faulty reasoning in asserting that when productivity increases, wages decrease. That is really flawed logic. It simply does not happen that way. No sane company would make pay cuts when productivity is good and expect to retain employees, and thus keeping the same level of productivity. However, he is right in that a bigger pool of unemployed labor would tend to drag down wages, but what he also fails to mention is that also a big pool of unskilled labor tends to erode wage levels. And guess what''s the biggest source of unskilled labor in the US, Mex?

Okay, enough with the channeling of Ulairi, but despite what the writer asserts, the US is not tumbling to a Third World economy. At worst, the US economy will wallow in mediocrity for the next few years (bad news for the Administration). However, at best, just by looking at recent trends, this will be a very slow and plodding recovery. Manufacturing jobs are disappearing and going overseas, and they will never come back. Unemployment traditionally lags behind economic recoveries, but in addtion to manufacturing, many employers have learned how to make due with less and probably won''t be hiring back to their pre-recession levels. The tech and net sectors still need years to pull itself out of the rut they''ve fallen in. It will take a long time to restore consumer confidence in both the economy and the stock markets (that thing with the NYSE last week was really poorly timed). So, while some of the graphs and numbers you may see linked to around here may be going up, it is a rather sluggish gain. We are not out of the woods yet. This guy, however, is an alarmist, a reactionary, and a rather bad economist.

Personal bankruptcies are up, way up. More people will go bankrupt this year than will graduate from college.

This has several contributing factors. First, the recession and associated rise in unemployment has had impact here. There has been a rise in bankruptcies during and trailing every recession. However, there is an underlying contributor in the combination of freely available credit and lack of education about financial responsibility. Giving credit to anyone over the age of 18 without any accompanying fiscal guidance is a recipe for disaster.

*The stock market is still far overpriced, by a factor of 2 to 3, based on historical price/earnings ratios. There isn''t going to be a stock market recovery. Look at Japan. The bubble there peaked in 1989 and still hasn''t recovered. It was at 39,000 then; it''s around 10,000 now, fourteen years later.

Not really true. There are some stocks that are over-priced, but by and large PE ratios are not that out of whack.

*Manufacturing is only 12% of US employment. That number was 16% a decade ago, and around 35-40% half a century ago. Most of the high-paying jobs for low-skill people are in manufacturing. That''s where the good working-class jobs went. Any job that involves large numbers of people doing the same thing repeatedly under direct supervision in a fixed location is a prime candidate for automation. Most of those jobs have already been automated. Technology continues to push manufacturing employment down.

Manufacturing is doing fine. You cannot measure the well-being of a sector of the economy by employment. Output, productivity, profitability and wages better determine the overall health of a sector. On this score, manufacturing is actually doing quite well.

The Federal Reserve Board''s industrial production index is up 5 percent since manufacturing employment peaked in 1998, and down just 5 percent from the index''s peak in July 2000, despite a rather severe recession in the meantime.

Looking at gross domestic product, real goods production as a share of real (inflation-adjusted) GDP is close to its all-time high. In the first quarter of 2003 -- the latest data available -- real goods production was 39.2 percent of real GDP. The highest annual figure ever recorded was 40 percent in 2000. By contrast, in the ""good old days"" of the 1940s, 1950s and 1960s, the United States actually produced far fewer goods as a share of total output. The highest figure recorded in the 1940s was 35.5 percent in 1943; the highest in the 1950s was 34.9 percent in 1953; and the highest in the 1960s was 33.6 percent in 1966.

Employment is down, but it is down in almost every major Western nation (only Canada and Italy showed manufacturing increases). But part of this change in employment is definitional changes in job classifications. It used to be that big companies tended to do everything in-house, so people like janitors and accounts were classified as ""manufacturing"" workers simply because they worked for manufacturing companies. Over the years, such companies discovered that it was more economical to contract out such work. That is why ""business services"" is one of the fastest rising categories of employment in the United States.

More later, but suffice to say that the author is fundamentally wrong about most of his assumptions. I have to go do some work...

No sane company would make pay cuts when productivity is good and expect to retain employees, and thus keeping the same level of productivity.

Hmm, how about just not giving any raises? And when the employee gets frustrated enough and moves on, hire someone fresh out of college at the same or less wage.

How about companies (game companies) firing whole teams when the product is complete to show revenue in the next quarter without headcount? Heaven help us if other industries pick up this trend.

*The stock market is still far overpriced, by a factor of 2 to 3, based on historical price/earnings ratios. There isn''t going to be a stock market recovery. Look at Japan. The bubble there peaked in 1989 and still hasn''t recovered. It was at 39,000 then; it''s around 10,000 now, fourteen years later.

I guess it''s too much work for the author to actually look at the data. The peak for the Dow in the US was about 11,500 in late 1999. The bottom since then was about 7,500 in Q3 2002. It''s been trending up ever since and is today at 9,300. The stock market is in solid shape and will surpass it''s bubble highs within a couple of years - without being artifically inflated.

Mex, read the dismal scientist.

Okay...continuing the lesson:

*Median income per hour worked in the US peaked in 1973. Yes. 1973. Best year ever for the working class. For thirty years, things have been getting worse. Slowly enough that there haven''t been riots.

I think he is referring to real wages, as opposed to ''median income''. Since the 1970''s, the real wages of the middle and lower class haven''t changed a lot, that is true. However, that is misleading. Globalization and technology "” the very things that have depressed some manufacturing wages "” have put many more luxuries within the grasp of poorer Americans. They now own better-quality cars and washing machines than rich ones did a generation ago; mobile phones and computers are now mass-market items.

That statistic is also being applied to an income quintile, and fails to take into account that there is a remarkable level of mobility within through those quintiles over time. 50-80% of the unfortunates in the bottom quintile push themselves into a higher quintile after 10 years.

*30 years ago, housing ate up about a quarter of income. Now, it eats up about half. And not because the housing is better.

Again, not true. Among big, rich countries, America has, by far, the cheapest housing. The price of an average urban dwelling in America is 8.3 times the average disposable income per head. In Japan, that multiple is 26.1 (down from 67.4 at the peak of their boom in 1989). Ireland is 18.2, Britain is 13.2, France is 12.8, and Germany is 18.5.

In large areas of the country, housing costs are quite close to the cost of new construction. These areas represent the bulk of American housing and they are areas where land is quite cheap. In high-price areas, housing is expensive because of artificial limits on construction created by the regulation of new housing. Government zoning and environmental protections have driven up the cost of land in these locations.

*Schooling is far more expensive than it used to be. The decline in the public school system means that people go to great lengths to move to areas with better schools, or put their kids in private schools. This is part of the driver behind housing costs. Higher education is also far more expensive, and less subsidized.

Again, he misses the point. Yes, we spend more money per student today than at any time in history. And yes, the educational quality we are getting in return is abyssmal. But money is not the problem. The problem lies is the deterioration of the nuclear family, the apathetic attitudes of many parents, and, most importantly the lack of discipline and ''touchy-feely'' teaching approach adopted by schools over the last 15 years.

Okay...I have to go catch a plane. I''ll finish later tonight with his remaining assinine assertions, as well as Rat''s misguided assertion about productivity and the recovery. BTW Rat...for the most part, very nicely done. Gotta give kudos.

Again, not true. Among big, rich countries, America has, by far, the cheapest housing. The price of an average urban dwelling in America is 8.3 times the average disposable income per head. In Japan, that multiple is 26.1 (down from 67.4 at the peak of their boom in 1989). Ireland is 18.2, Britain is 13.2, France is 12.8, and Germany is 18.5.

I''m going to pick a bone here. Ireland, Brittain and Japan are island nations. But the crux of the matter is you cant really compare the U.S. to other countries. Maybe Austrailia might prove a fruitful comparison.

Of course this only goes to further support the fact the author is hugely sensationalist.

most importantly the lack of discipline and ''touchy-feely'' teaching approach adopted by schools over the last 15 years.

""Spare the rod, spoil the child.""

I''m going to pick a bone here. Ireland, Brittain and Japan are island nations. But the crux of the matter is you cant really compare the U.S. to other countries. Maybe Austrailia might prove a fruitful comparison.

No, you absolutely can compare them. And yes, the abundance of land in the US is one of the prime reasons why housing in the US is so affordable in comparison.

I never thought I''d say this but I''m finding this whole economics business very interesting.

Can you elder wise people recommend a good book-introduction to economics, macroeconomics, or whichever you think is most useful in life?

"Mex" wrote:

I never thought I''d say this but I''m finding this whole economics business very interesting.

Can you elder wise people recommend a good book-introduction to economics, macroeconomics, or whichever you think is most useful in life?

The most important Economic book ever written: The Wealth of Nations: An Inquiry into the Nature and Causes.

Another important book: Capitalism and Freedom.

And some Keynes: The General Theory of Employment, Interest, and Money

Ah, economics. Perhaps any of you who''re ''in the know'' about that particular brand of voodoo explain how it''s possible to deem the US economy healthy with a trade deficit of 450 billion? Caught that tidbit in the paper a couple of days ago and found it very baffling. In very small words, please.

[size=9]EDIT: Some words had gone mysteriously missing.[/size]

Mex, if you want a intro book on economics, try this or this. Arguably the most important economics book written since Adam Smith is Capitalism and Freedom.

how it''s possible to deem the US economy healthy with a trade deficit of 450 billion

One of the problems with economics is that most people never bother to learn even a rudimentary level of it (including politicians). All the nonsense we hear about balance of payments deficit ignores the fact that there are two types of accounts: a goods and services account and a capital account. Any imbalance in the goods and services account is offset by the capital account (stocks and bonds). Dollars are coming back to America, in the form of Treasury bonds to help sponsor Congress''s profligate spending. Also, foreigners use their dollars on Wall Street to purchase stocks, bonds and other financial instruments.

Dollars are coming back to America, in the form of Treasury bonds to help sponsor Congress''s profligate spending. Also, foreigners use their dollars on Wall Street to purchase stocks, bonds and other financial instruments.

So the trade deficit is offset by foreign investment? Doesn''t that put the economy in a rather precarious position if the foreign money stopped?

Again, not true. Among big, rich countries, America has, by far, the cheapest housing. The price of an average urban dwelling in America is 8.3 times the average disposable income per head. In Japan, that multiple is 26.1 (down from 67.4 at the peak of their boom in 1989). Ireland is 18.2, Britain is 13.2, France is 12.8, and Germany is 18.5.

I noticed you missed the author''s point on this one. He didn''t compare the housing costs to other countries, he claimed that they had doubled in the US during the last thirty years. *shrug* Dunno how true that is, just thought I''d point it out.

So the trade deficit is offset by foreign investment? Doesn''t that put the economy in a rather precarious position if the foreign money stopped?

I guess, but that would never happen. Dollars are only useful for buying things in America. So, if they don''t come back to America in the form of purchased products or capital investment, what are they going to do with them? Hide them in a mattress? If that is the case, cool. If we knew they were going to go right out of circulation and never come back to the US, we could just print tons of them and all retire.

Just like they won''t stop selling products to America, they will never stop buying back or investing.

I noticed you missed the author''s point on this one.

No, I just ignored it, as it was wrong too. he was making to point that housing costs compared to income had increased dramatically. Which they haven''t. I tried to illustrate that housing costs in the US are very cheap compared to the rest of the world. I''ll dig up the exact numbers if that is of interest to you...

"JohnnyMoJo" wrote:

No, I just ignored it, as it was wrong too. he was making to point that housing costs compared to income had increased dramatically. Which they haven''t.

Ah well, that''s all I was wondering about.

I tried to illustrate that housing costs in the US are very cheap compared to the rest of the world. I''ll dig up the exact numbers if that is of interest to you...

Not really, no. It''s not that relevant in a discussion about changes to American''s citizens'' lives, anyway. I''d much more interested in some classy pornography, if you''re in the mood for digging stuff up.

Thanks a lot for the book suggestion guys, I just ordered a few .

Soon as I finish GEB and Game of Thrones, I''ll dive into it.

So, in conclusion, everything will be allright?
There was also the failure of the Cancun trade talks, which certainly affects mostly poor countries , but I imagine the US is going to feel a bit under the weather too.

The trade defecit comes from the manufacturing industry which we are not proficient at. We design widgets, we send them over seas to be produced, and then we buy them.

Isn''t there something inherently wrong in buying back something we designed?

The trade defecit comes from the manufacturing industry which we are not proficient at.

We are very proficient at manufacturing. Matter of fact, if you look at the percentage of GDP, you see that manufacturing is doing great. And in order for manufacturing to be counted in GDP, it has to be a finished product.

The manufactured goods that we buy from overseas is some high-end goods (electronics or cars), but mostly low-end goods such as clothing.

Isn''t there something inherently wrong in buying back something we designed?

No. Thats the way the world works and you know it. Its the world economy after all. The explosion of internet run businesses is only going to see this trend increase.

BTW - dam its good to be back after this mornings mess!

I mean that wouldn''t it make more sense to design, manufacture, and sell it here to help out the domestic economy rather than farm the manufacturing out overseas to save a few bucks?