US Economy Forecasts

Warren Graham asked:


As a practitioner in the fields of bankruptcy, workout and corporate restructuring, and in a shameless admission of self-interest, I readily admit to being vitally interested in whether the U.S. Economy is due for a downturn. It has often been said that economists have predicted nine of the last five recessions. The notion was also advanced, by the Clinton Administration, not so long ago, that the business cycle, as we have always understood it, was a thing of the past. Is this so?

On the one hand, there have been only two recessions of any real lasting power over the past twenty years. The first was in the early days of the Reagan Administration, when aggressive budget cutting and revenue loss occasioned by the David Stockman “supply side” economic strategy took an enormous bite out of government spending power, forced massive public borrowing, and triggered a recession. The economy soon grew itself out of recession, either through growth or excessive government deficit spending, depending on one’s point of view.

In 1990, another recession ensued, partly as a belated result of the 1987 Stock Market crash. This downturn lasted about two or three years, and the economy expanded once again. After a lengthy period of prosperity, the Clinton Administration declared the business cycle dead, and boasted that the combination of fiscal and monetary policy had permanently rendered it obsolete.

The bursting of the dot-com bubble allegedly triggered a recession in 2001, but it was short-lived enough to be barely noticeable (except, of course, to those who had their entire net worth tied up in it), and was soon replaced by a real estate bubble. By the time the powers that be admitted that there had been a recession, they declared it over, in the same breath. Not even the horror of 9/11 was able to take the speculators off track. In the meantime, hedge funds (truly a misnomer for what, in essence, are private equity funds) were able to generate unprecedented liquidity by “monetizing” all sorts of collateralized obligations…from so-called “sub-prime” mortgages to more conventional asset based lending obligations. This, in truth, was nothing more or less than a replay of the leveraged buyout craze of the 1980’s, in which speculators and corporate raiders took out the value of companies today in the hope that tomorrow’s earnings would be sufficient to replace the withdrawal. And if not, well, that would be someone else’s problem.

The major difference this time around, of course, is that the vast pools of liquidity generated by this mechanism have (after, of course, making some people incredibly wealthy), been largely plowed back into businesses as extremely low cost loans, mezzanine financing and equity. Too much money chasing too few deals has led some of these funds (and, indeed, more traditional lenders, who have to put their shareholders’ investments to work), to put money into marginal businesses, or to finance questionable collateral. Thus far, it has paid off, with the seemingly endless sources of easy money available, and the economy’s enjoying a very long “sweet spot,” of profitability and resource to capital.

The problem will come in one of two ways: either the economy will heat up noticeably, raising the cost of funds to businesses in the form of higher interest rates or reluctance to fund marginal profits, or perhaps losses, or the economy will weaken noticeably, which, though resulting in lower cost of borrowing, will ironically result in tighter lending standards, and increased business failures. You see, profits are infinitely easier to generate if the cost of money is essentially taken out of the equation. In more traditional business environments, debt service is an important component of the profit and loss analysis.

This phenomenon is already beginning to manifest itself in the highly publicized “sub-prime” mortgage crisis. Secondary and tertiary lenders (and in some cases banks and funds lending under the radar screen through the vehicles of these lenders), have been extending mortgages to homeowners whose creditworthiness is suspect, betting on an endlessly rising real estate market, and continued historically low rates. This system worked just fine for a long time, as the position of these lenders was protected by their enhanced collateralization and the ability of borrowers to carry their overleveraged positions through availability of easy money. Now, with the national decline in home values, and upcoming ratcheting up of adjustable rate mortgages, many of these loans will go into default.

What makes this situation particularly dangerous is that the original lenders, for the most part, no longer hold the paper. These mortgages have been “monetized” and place in pools of securities, managed in bulk by faceless, nameless trustees. When the mortgages default, these trustees will be forced to foreclose and will, for the most part, have no discretion to “work out” the loans. This is a potential disaster waiting to happen, especially for the middle class.

The cheerleaders for the economy and the stock market, who contend that the “sub-prime” and home value problems are likely to be contained and not spill over into the economy at large are, I believe, missing a salient point. A full two thirds of the U.S. economy is driven by the only weapon left in our arsenal: our seemingly endless appetite for consumer goods. After all, we scarcely manufacture anything in this country anymore. Ours is almost entirely a service and consumer driven economy. Large numbers of homeowner foreclosures, caused by overleveraging (in many cases, by homeowners seeking to retire high rate credit card debt) cannot fail to have an effect on consumer spending.

In addition, our very weak dollar threatens to make us a secondary power even in consumption. For example, China’s consumption is growing exponentially, with a rapidly growing economy and the largest savings rate in the World (not to mention a billion potential consumers). Chinese holders of stock brokerage accounts have more than tripled in the last two years. And what will we have to export to these folks? Cars? We can’t even sell them here. Technology? Well, many of the intellectual property originates here, but the products are much more cheaply manufactured abroad, as is the service component. Have you called Microsoft tech service recently? Did you get connected to the Silicon Valley or Bombay/Mumbai?

The competition around the World for our historical economic pre-eminence is fierce. If our lead in manufacturing goes (and for the most part, it already has) and our position as the great bastion of international consumerism diminishes, we are threatened with becoming a second rate economic power. And all the easy money in the World will not save us from that.

The business cycle may, indeed, be a thing of the past, but not in the way it has been advertised. This time, we may not recover so easily from the downturn. That downturn may yet be a long time coming, what with the almost conspiratorial partnership of business, financial institutions, the markets and the government to inject oceans of liquidity into a system which depends upon all of our acquiring stuff and spending well beyond our means. But underlying all of that cash, we must have a solid profitable business base. Therein (and only therein) lies our only hope for future economic dominance.

Warren R. Graham

Copyright 2007

Vladimir Gonzalez asked:


Philippines Economy

The Philippines is one of the poorest countries in Asia, although, at some point, there had been great expectations concerning its economic growth. After the end of World War II, The Philippines were expected to become Asia’s economic powerhouse, but in reality, it was not the case.

The country has a troubled historical background, after being occupied by the Spanish for several centuries, and by the United States of America. These occupations lead to a group of families controlling huge land estates. Some of these estates are used in agricultural activities, which involve about 40 per cent of the country’s working population. Agricultural activity accounts for 20 per cent of the Philippines’ Gross Domestic Product. Economic changes and reforms are necessary for the Philippines economy on the long term. Great transformations are not likely to take place because of the landed families which have a lot of political and economic power and influence.

The Philippines exports many electronics, as it involved in manufacturing activities for certain MNCs ( multinational corporations ) like Texas Instruments, Toshiba, Intel, Matsushita and Fujitsu. This way, the manufacturing industry makes room for many jobs. More and more Filipino businesses and individual users move their activities online, buying personal computers and networking systems. The IT sector is in a continuous development.

Mining is also important for the Philippines’ economy. Metal mining accounted for 44 per cent of the value of production. Japan is one of the most important importers, receiving gold and copper from the Philippines. The Philippines are the biggest source of refractory chromite in the world, at Masinloc. It is also rich in nickel ( from Hinatuan, the Dinagat Islands, Surigao and Palawan ), gold (from Luzon, the Negros Islands, Mindanao, Masbate ), silver ( from Mindanao ) and copper ( Negros Islands, Marinduque and Cebu ). The Mining Act was signed in 1995. Its purpose was to promote the Philippines’ mining industry to other countries. It also ensured economic viability and efficiency for mining activities. Companies were allowed to receive a four year permit which allowed them to explore certain areas.

Further reading on www.EconomyWatch.com:

Economic Structure of the Philippines

Imports and Exports of the Philippines

Demographics of the Philippines

Gurumurthy Kalyanaram asked:


Economic-development choices and experiments in the last fifty years (e.g., China, India, Soviet Union) have now fairly conclusively demonstrated that mass economic prosperity is better achieved through a focus on the growth of wealth rather than its distribution.

However, there are many influential Indian intellectuals, policy-makers and elected officials who do not agree with this assessment. In some quarters, these policy-makers may be seen — and they may be right — as impediments to even faster economic growth in India. But the caution and wariness expressed by these officials have led to a more stable and predictable economy in India. And, here, are two prime examples.

(1) Caution on foreign capital investment: India has been more careful and sometimes even rigid in approving foreign capital investment — particularly in some areas such as insurance, media, industries with implications for national security. These regulations — though quite often a bit too restrictive — have generally provided stability to India’s economic growth. For example, there has never been run-away inflation (e.g., Latin American countries) or serious collapse of confidence in the currency (e.g. Asian crisis.) And now look at the serious challenges that the U.S. economy in regulating the hedge funds and sovereign wealth funds — India’s policy appear prudent in the context of this.

(2) Focus on the poor, and poverty: The unprivileged and those struggling in deep poverty constitute about 800 million, about two-thirds of India’s population. Simple computations would establish that India’s macro economic growth rate, and GDP would increase more dramatically even if a fraction of the 800 million Indians become part of the economic engine. That requires that they participate in the economy — consumer investment is the engine — which, of course, translates into policies that are likely to favor some level of redistribution even if it forsakes some growth. At the margin, the benefits of such policies are monumentally greater than any losses.

Overall, these Indian policy-makers who have not adopted the market-economic philosophy without substantial skepticism have contributed to a modulated approach to economic development and growth.

Dane asked:


Though the housing bubble deflated about two years ago, its true effects are only now beginning to emerge. In late 2006, when the economy first began to show signs of weakness in the housing market, most economists predicted that a recession was very unlikely, and that any downturn in real estate prices would be localized and mild. In reality, a global downturn is now a real threat, with the final price of the credit crunch projected to exceed $1 trillion dollars.

Not only have falling house prices in the US spread to other markets abroad, they have contributed to massive losses in other areas of lending such as credit cards, and the financial industry, which is now reeling from the US government bailout of Bear Stearns. What does this mean for emerging economies like China and India? In the short term, volatility seems to be the order of the day, with India’s fledgling exchanges rocked by jittery investors. Until financial centers and investors can regain confidence, market conditions will be exaggerated. Early trading also plays a psychological role for investors, as news developments impact Asia before Wall Street opens.

The US and the UK both face difficult home pricing corrections which will continue to hamper growth. Most homeowners expect, if not to make a profit, not to sell their houses at a loss, which is a difficult pill to swallow. And if they can’t sell their homes for what they think they’re worth, then waiting it out contributes to prices falling, thus exacerbating the problem.

While government intervention has been exceptionally forthcoming in efforts to preserve confidence in financial markets, less attention has been given to homeowners who are being foreclosed on over the next year, which is only so low because of robust growth in Asia.

Another prospect which looms over every government is the specter of inflation, which threatens to overtake the slumping economy as the number one priority for the Federal Reserve and other central banks, who have had to take extreme action to prevent further liquidity losses. The Fed has sold off over $100 billion in auctions and lowered interest rates five times in an attempt to lower mortgage interest rates, but confidence will remain shaky until the full extent of investment bank’s sub-prime exposure is realized. Stuck between a rock and a hard place, central banks are taking decisive action in hopes that the economy will level out without pushing inflation to dangerous levels.

Vladimir Gonzalez asked:


Hong Kong Economy

Subject to both British and Chinese rule, since the 70’s Hong Kong economy has also been subject to an economic policy dubbed positive, in which the policy of non-interventionism was predominant, as it was hailed by the country’s former financial secretary.

Cited and praised by worldwide economists, due to the benefits of this laissez-faire capitalism, Hong King’s kind of policy eventually placed the country among the world’s freest economies, for 14 consecutive years. The World Report of Economic Freedom also places Hong Kong first, though with some arguments addressed to the particular term laissez-faire, which inadequately characterizes the country’s policy.

To get a better idea, in Hong Kong the government owns the land, and it is the government the one that leases it to private users, the sale of the land being forbidden. The price of the land is thus kept stable- some have even argued that it would be artificially high. This policy gives free way to the government to be able to better support, at a lower rate public spending. Even more, the country’s liberal political-legal environment has been registered as more stable than that of most countries.

Hong Kong Economy enters the high-income group countries, according to the Classification of economies by Income. The country also enjoys a predominant free market economic system, dependent on International Trade and Commerce

Based on the estimated data of 2005, the Gross Domestic Product in Hong Kong was at $254.2 billion, with a growth rate of 7 %. That same year, the GDP per capita was at $36,800. With these figures, the economy of Hong Kong can easily be compared to those of the biggest economies of Western Europe. The increase in the GDP was calculated at a rate of 5% between 1989 and 2005, even though the country has had two recessions, as a result of the Asian financial crisis in 1997-1998 and also the global downturn from 2001-2002.

The country’s unique geographical location and diverse trading opportunities, as well as abundance human resources, have driven Hong Kong to great wealth-generating assets. Hong Kong also prides with one of the best-sheltered harbors, now a highly developed and thriving international port, it also was major port for pirates for centuries, before the British colonized it in 1841.

Having a skilled, adaptable, and also hard-working labor force, even more so once modern British business methods were implemented, together with modern technology, the chances for external trade, investment, and recruitment were soon doubled.

Further reading in EconomyWatch.com:

Overview of the Economy of Hong Kong

Imports and Exports of Hong Kong

Economic Indicators of Hong Kong

Vladimir Gonzalez asked:


The Importance of Understanding Economic Terms

The term "Economics" is commonly defined as "The science of how people make choices for the allocation of scarce resources to satisfy their unlimited desires."

Though a major concern, which analysts should pay more attention to, the distribution of wealth has lately become less important than it used to be. The science dealing with this is political economy, which is the science that has to do with the nature of and of economic value, together with the production and distribution of valuable goods and services.

It is very important for everyone to thoroughly understand a set of highly used economic terms, such as wealth, production, value, labor, land, etc, and here are some of the definitions of these economic terms:

· Wealth - all material things produced by labor for the satisfaction of human desires and having a certain exchange value.

Moreover, wealth is material and is produced by workforce and it can satisfy human desires. However, contrary to common belief, money is not considered wealth, if not a medium of exchange, because of which, one can acquire wealth, which also has exchange value.



Production - all the processes by which human labor creates valuable goods and services and brings them to the ultimate consumer.



Production includes not only the producing or manufacturing of goods, but it also has to do the process of bringing them directly to the consumer. The factors that help produce wealth are land, labor and also capital.

· Value - the quantity of labor or products of labor that people are generally willing to give in exchange for something.

The economic value of an item is just what it will exchange for, under normal circumstances.

· Land - the entire material universe exclusive of people and their products.

Land includes not only the dry surface of earth, if not all other natural materials, as well as forces and opportunities.

· Labor - all human exertion in the production of wealth and services.

Both entrepreneurs along with blue-collars are part of this category; labor does not only refer to physical strength, whereby finished products are produced, if not also to mental work, whereby wealth is also produced.

· Capital - wealth used in the process of production, or in the course of exchange.

· Distribution - The division of wealth among the factors, which produce it.

Rent, wages and interest are the avenues of distribution are, and here is also their definition:

· Rent - that part of wealth, which is the return for the use of land.

· Wages - that part of wealth, which is the return to labor.

· Interest - that part of wealth, which is the return for the use of capital.

These factors involved in production all work together and produce a "pie", called "wealth."

Further reading on www.economywatch.com and www.economypedia.com:

Economic Terms on EconomyWatch

Encyclopedia of Economic Terms - Economypedia.com

Definition of "Global Economy"

John Kozy asked:


Alan Greenspan’s The Age of Turbulence contains a chapter titled The Modes of Capitalism which is full of revelations which Mr. Greenspan unfortunately failes to recognize. The chapter describes the various forms Capitalism has taken in a number of countries, mostly North American and European. Of course, that such various forms of Capitalism have been implemented in different countries is not news. But what Mr. Greenspan fails to notice is that similar chapters could not be written about physics, chemistry, geology, meteorology, astronomy, physiology, botany, astronomy, etc. but could easily be written about Christianity, Islam, Hinduism, Buddhism, and even astrology. The point is, science does not have sects, but ideologies do. Of course, economists shun the word sect, preferring instead the euphemism school in an attempt to gloss over the non-scientific nature of economics. Mr. Greenspan’s modes of Capitalism are nothing more than sects, and no endeavor that is comprised of sects is a science.

Mr. Greenspan’s attempts to explain the existence of these sects begins to reveal just how unscientific economists can be. He writes, “To me, the degree of willingness to take risks is in the end, the major defining characteristic that separates countries into the various modes of capitalism.” Mr. Greenspan ranks “the United States as the most ‘free’ of the larger economies” and believes, apparently, that therefore, Americans are less risk averse than people elsewhere. But there is not a lick, jot, fleck, or speck of evidence to support this belief. So although it may be true that the United States is the most free of the larger economies, other reasons for which there is considerable evidence can be cited as more likely explanations. The most obvious of these is differences in educational systems. It may be, for instance, that Americans support this freer economic system because they are poorly educated and therefore more gullible than people in countries that have better educational systems.

There is no question that the American educational system is inferior to the educational systems in many other countries. The will-publicized country-by-country comparisons that invariably show that American students are less competent in many areas of study need not be repeated. But there are far more telling examples of American educational inferiority. When graduates of some of America’s most prestigious universities, such as the current crop of presidential candidates, can openly reject evolution and when various branches of the national government routinely rewrite scientific studies to make them conform to the administration’s political ideology, the failure of the American educational system becomes evident. In America, ideology trumps truth.

An explanation of the failure of even America’s universities to educate their graduates is not hard to find. That America has had a long-standing anti-intellectual culture has been well documented. See Richard Hofstadter’s Anti-Intellectualism in American Life, for instance The American educational system is fractured. Local control of primary and secondary schools, often controlled by school-boards made up of poorly educated people who seek to promote personal agendas, is a tradition dating back to the nation’s founding. The makeup of state school boards is not different, and there are fifty of these. No common standards exist and even state-by-state comparisons are difficult to make. Then, too, American universities were not generally founded to educate people. They were founded to train people for professions; in effect, they were founded as vocational training rather than educational institutions. After the Civil War, the creation of the land-grant university system was explicitly designed for vocational training. As a result, students are taught how to carry out techniques, but rarely taught to critically examine the theories from which those techniques are derived. This description characterizes what goes on in most of the professional schools and colleges attached to our universities. It especially characterizes our graduate departments of economics. One small but revealing example provides anecdotal evidence that supports this view and the view that America’s universities promote ideology over truth is this: Gilles Raveaud, I believe, commenting on Greg Mankiw’s teaching at Harvard has written, “Some of the students I had at Harvard have described Mankiw’s course to me during private conversations as ‘massive conservative propaganda.’ One of them told me that he thought that Mankiw manages to ‘indoctrinate a whole generation.’ In 2003, a protest against a similar course then proposed by professor Marty Feldstein, an ex-adviser to President Reagan, led to the creation of an alternative intro economics course, taught by radical economist Steve Marglin. But while Mankiw’s course gives the required credits to students, Marglin’s does not.” Just as there is no honor among thieves, there is apparently no honor in universities that get huge donations from America’s capitalists who have gotten their fortunes by picking the pockets of consumers and employees and who would be loathe to see their ability to continue to pick those pockets restricted by some idealistic idea of truth.

Mr. Greenspan ignores completely one salient difference between American and Continental educational systems. In the American educational system, analytical thinking prevails. Everything is considered in isolation from everything else. Economic phenomena are examined as though they had no consequences to society in general. In Europe, however, phenomena are considered together as a gestalt. The consequences of changes in one social environment are related to the effects those changes have in other social environments. Whereas American economists think almost exclusively in terms of economic growth, Europeans think in terms of society as a whole. American economists can always find ways of excusing the adverse human consequences of an economic process; the Europeans emphasize the adverse consequences to society as being more important than the economic process. This distinction has been evident in economic circles since the formation of the so-called historical school, and Mr. Greenspan should have recognized it.

But Mr. Greenspan reveals something else about economics that is rarely called attention to—the delusions economists labor under in relation to the real-world economy. When Mr. Greenspan makes risk-taking the characteristic of the American economy, he is delusional. Certainly America has its share of risk-takers. Whether it has more or fewer risk-takers than other nations is questionable. But risk-taking does not characterize the American or any other economy. Economic risk-taken may be thought of as a characteristic of entrepreneurs. But entrepreneurs alone cannot make an economy; if everyone was an entrepreneur, no workers would exist to carry out entrepreneurial ventures. Kurt Wicksell in his Lectures on Political Economy nicely defines the entrepreneurial process: “He who borrows money at interest does not as a rule intend to keep it, but to exchange it at the first suitable opportunity for goods and services, by the productive use of which he hopes to be able to acquire not merely the equivalent of their price but a surplus value. . . .” Although that may be true of entrepreneurs, it is not why most people in today’s real economy borrow money. When people borrow to buy homes, automobiles, appliances, etc., they do not intend to use their purchases in ways that will create surplus value. In fact, these people are not investing at all. The money they borrow is a sunk cost for a place to live, a means of transportation, and other such uses. And although Americans have become a nation of borrowers, they have not become entrepreneurial risk-takers. Any economist who thinks of the economy in terms of entrepreneurial risk-taking is engaged in self delusion.

Mr. Greenspan is also delusional when he writes about creative destruction. Certainly, creative destruction does happen, but not nearly as often as Mr. Greenspan and other economists seem to think. As examples of creative destruction, Mr. Greenspan mentions the telegraph industry’s demise because of the introduction of the telephone, the tin can’s demise when the aluminum can became feasible, which he relates to the demise of the steel industry. Certainly some workers were displaced when the telephone industry replaced the telegraph industry and then the aluminum industry reduced the steel industry. And certainly such displacements cannot be avoided and no attempt should be made to avoid them. But that is not what is happening in America today. When Fisher-Price offshored the manufacturing of toys to China, it was not because the Chinese had developed new toy-making technology. In fact, those Chinese employ older technologies than those what would have been used in America to manufacture the same toys. When computer related industries offshore their helpdesks, it is not because new helpdesk technologies have been developed in the offshored countries. The technology used in offshore places is exactly the same technology that is being used in America or Europe or anywhere else. So although there is a phenomenon known as creative destruction, what is happening in America today is mere destruction. The other half of Mr. Shumpeter’s thesis is entirely absent, and for Mr. Greenspan to think otherwise is delusional.

Again, Mr. Greenspan writes, for instance, that “in a free society . . . the vast majority of transactions must be voluntary, which, of necessity, presupposes trust in the word of those with whom we do business. . . .” And “It is remarkable how much trust we have in the pharmacist who fills the prescription ordered by our physician.” But this is sheer delusion. People don’t trust the businesses they buy from. In the case of the pharmacist, people buy from him because there is no alternative. And does anyone trust the pharmaceutical firms that market the medicines we are prescribed? If they do, they must be wholly ignorant of the revelations that such firms hide from regulators, physicians, and consumers data of adverse effects and even life-threatening dangers. Do I exhibit trust in Microsoft when I purchase one of its operating systems or applications, knowing full well that what I am getting are poorly coded programs containing innumerable bugs and security lapses that Microsoft will attempt to patch by incessant releases of what it euphemistically calls Service Packs? Trust is something that does not exist in business; that is why contracts exist, and why firms such as Microsoft exempt themselves from all liability for damages within their contracts. If Mr. Greenspan trusts the firms he does business with, he is delusional.

But the unavoidable problem with Classical/Neoclassical economics, which Mr. Greenspan glosses, is its immorality. He writes that, “Clearly, not all activities undertaken in markets are civil. Many, though legal, are decidedly unsavory.” But he also writes, “When I was a child, jokes about the scruples of used-car salesmen were widespread, but in truth a flagrantly (italics mine) unscrupulous used-car salesman is one who will be out of business before long.” Mr. Greenspan fails to recognize that this statement is entirely meaningless. It does not say that businessmen are not unscrupulous; it does not say that competition puts unscrupulous businessmen out of business; it does not say just how unscrupulous a businessman must be to be flagrantly unscrupulous.

Everyone knows that businessmen routinely break even the most fundamental moral maxims, and any economist who denies this must explain the neologising and persistent existence of such phrases as Caveat Emptor, a pig in a poke, and letting the cat out of the bag. In an honest economy, these expressions would have no use. As a matter of fact, there is absolutely no reason to believe that people in business are any more honest than the population in general, and there is good reason to believe that business in a free-market promotes crime and vice, both of which are epidemic in the United States. It is no mere coincidence that when the Soviet Union collapsed and when Israel was persuaded by the Reagan administration to abandon its socialist traditions and free-market practices were introduced, both crime and vice emerged as important social problems.

In fact, free-market economics institutionalizes immorality, which is proven by the mere fact that puffery is an acceptable practice. Businesses that employ puffery to market products will, without batting an eyelash, discharge an employee who is found to have puffed up his resumé. I’m not talking about sophisticated moral philosophies such as Kant’s Categorical Imperative, but those simple maxims embodied in the Decalogue and the Golden Rule. These immoral practices of business are widespread and far-reaching and they contradict many of the favorite clichés of economists.

Mr. Greenspan claims, that free markets increase material well-being to a greater extent than regulated markets. But tell me, how does the marketing of bottled water, which is never tested and whose source is rarely identified, increase the well-being of the people who are snookered into buying it, especially when ordinary tapwater is regularly tested, comes from a well-known source, and is considerably cheaper? In fact, doesn’t it reduce that well-being, since the money wasted on it could have purchased something that provided a real material benefit? The same questions can be asked about numerous other products—the McDonalds hamburger, Taco Bueno’s tacos, pizza from numerous pizza vendors—the list is endless. But there’s more. The Fox affiliate in Dallas regularly runs a feature called “Deal or Dud.” The channel buys products heavily advertised on television and has them tested by ordinary viewers. If a product works as advertised, it’s called a Deal, if not, it’s called a Dud. Every so often the channel comes up with Deals, but most products tested are Duds. As a matter of fact, Mr. Greenspan’s book is itself a dud. It was not published because of the merit of its content; it was published merely because of the notoriety of its author. Mr. Greenspan’s name on the title page can be likened to other forms of puffery. So how does manufacturing and marketing products that don’t work increase the material well-being of consumers? And consider the snake-oils people are sold that are classified as dietary supplements? The manufacturers of these products could easily have them double-blind tested to determine their effectiveness. But they don’t. Is it because they know that if they did, the products couldn’t be sold?

Mr. Greenspan and other economists claim that the free market results in the most efficient allocation of capital. But how can anyone claim that the capital expended on the products mentioned in the previous paragraph is efficiently allocated? In fact, one could easily claim that it is completely wasted, as is the capital lost during economic downturns. So anyone who believes that American business are generally honest are as deluded as the insane person who believes he’s Napoleon.

Not only is free-market economics immoral, there is some evidence that it could not exist if the immorality were removed. In an impressive new book, The Social Conscience, Michel Glautier asks whether a caring society can exist in a market economy? His analysis suggests that recent and continuing changes to the market economy are putting the achievement of a caring society beyond reach. And the following passage comes from an abstract of a paper by Andrei Shleifer: Explanations of unethical behavior often neglect the role of competition, as opposed to greed, in assuring its spread. Child labor, corruption, “excessive” executive pay, corporate earnings manipulation, and commercial activities by universities all promote censured conduct. When unethical behavior cuts costs, competition drives down prices and entrepreneurs’ incomes, and thereby reduces their willingness to pay for ethical conduct. Unfortunately, both authors are ambivalent when it comes to drawing hard conclusions.

In a rational society, a distinction would be made between scientific enterprises, always keeping in mind that all science is a work in progress, and enterprises grounded in mere belief. The political system would defer to scientists in matters involving the former and allow the people to decide the kind of society they would prefer in matters involving the latter. So the choice of an economic system ultimately comes down to what kind of society people not only want for themselves but for their progeny in future generation. Do we really want an economic system that institutionalizes prevarication and encourages greed, crime, and vice? Those who answer this question affirmatively should, perhaps, have 666 tattooed on their foreheads.

In the second chapter of The Age of Turbulence, Mr. Greenspan writes that he “discovered that some of the scientists in the Manhattan Project subscribed to a philosophy called logical positivism. . . . The mathematician in me embraced this stark analytical credo. . . . The world became a better place, I thought, if people focused exclusively on what was knowable. . . .” Unfortunately somewhere alone the way, Mr. Greenspan lost this focus and became an apologist for the free-market system when he “decided to engage in efforts to advance free-market capitalism.” We are all now faced with the consequences of his decision.

Wise men know the importance of periodically asking themselves, What if what I believe to be true is wrong? It is time that our economists start asking themselves this question.

© 2008, John Kozy

B. Estelle Lowe asked:


Recent trends imply a disaster for the current state of the economy. What is fundamental task for the U.S. Free Market Economy? Are there new rules or laws to play the game?

The central economic task for a society, in relation to the free market economy, is to secure cooperation among people in using what is available (when scarcity & surpluses exists) to obtain what is wanted. The ‘Rules of the Game’, according to Heyne, Boettke, & Prychitko, help facilitate the economic process, in which the rule and law and property rights are components. For example, the resolution of the competition for use of a scarce resource depends on whether property rights are well defined, well enforced, and readily transferable. What does this have to do with banks failing, businesses going under, and major Government bailouts? This means that all management decisions in a free market economy should be lawful and ethical, or the economy will not function properly. Economically, the most important feature of the rules of the game is clearly defined property rights and a rule of law that recognizes them.

Property rights are essential features of the free market economy because they encourage market coordination, rather than chaos (when imposing extensive market control); and create opportunities for net (comparative) advantage when scarcity exists. In fact, “a market economy is based upon private property rights – rights associated to specific individuals in the form of legal ownership”. They define and specify who owns what. These rights can be voluntarily traded or exchanged for similar rights to other goods and services, which is part of the economizing process when scarcity imposes constraints. Essentially, private property rights form an important part of the rules of governing most of the social interactions in which people regularly engage, and provides members of society with incentives and dependable information. In the economic way of thinking, Heyne, Boettke, & Prychitko (2003) contend that “the emergence of clearly defined and enforced property rights does encourage the effective use of already existing scarce resources… and the discovery of new resources”.

How does the scope or role of Government shape the wealth of nations? Consider that some level of government spending is necessary to ensure that the basic structures of society function smoothly enough to facilitate economic activity.

According to Adam Smith, a successful economic system is developed in a well-governed society. Private property rights and the rule of law provide an infrastructure that allows and ensures the protection of people and: (1) their future investments, (2) organization of useful projects, or (3) the initiation of other costly undertakings. The freedom to exchange reasonably secure property rights are necessary conditions for the evolution of a successful commercial society, in which people cooperate effectively in creating and using resources to serve one another’s wants, so that economic growth occurs and prevents poverty. “A rule of law recognizes private property rights, which allows the freedom to exchange and provides incentives for individuals to specialize in the activities of their comparative advantage”. This is secured by the rule of law, which encourages wealth, and prevents the subjection of people to the tyranny and exploitation of others. Therefore, a commercial society can develop successfully when there is the rule of law.

 

J.Dean asked:


As anglers, I doubt we even realize the impact we have on our nations economy. Hopefully this will give you some insight on the positive cash flow we create by just doing what we are so passionate about.

In the past I’ve designed a couple of websites for tournament anglers and in the process I wanted to collect data to present to potential supporters and sponsors to make them aware of impact and participation. I recently “re-discovered” that data and thought you might find it interesting. So below is some of the numbers I collected from various sources that paint a pretty good picture of how fishing has evolved in to a money making, national past time.

Right now, the only ripple of interest to your angling friend is the one made by the fish as it surfaces at the end of the line. But all around, the money spent to buy tackle, gas for the boat and film to record the one that didn’t get away, is having a tremendous, positive impact on the economy. On average, an angler spends over $1,200 every year on the sport. Hidden, but none-the-less real, is a multiplying factor that effectively triples what you spend as the initial expenditure ripples through the economy. Take for example the $10 plunked down by an angler for a new a lure. It spreads outward just like the ripples made after the lure hits the water. That revenue helps the store’s owner pay her rent, bills and employees. These individuals then use part of that money for other goods and services and the rippling effect further spreads and repeats. Of course, ten dollars isn’t very significant by itself, but when 44 million anglers spend $41.5 billion in a year, the result in jobs, wages, and other economic effects is an extraordinary pillar of America’s economic health. More focused on playing the fish at the end of the line, your typical angler gives little thought to how his hobby is helping provide his fellow Americans a boatload of benefits. The 1.1 million jobs, $7.3 billion in tax revenues, and $30 billion in wages generated by recreational fishing are many times greater than those created by corporate giants like Ford, Microsoft or Nike. Generating more than $116 billion in total output, this remarkably simple activity of dipping one’s line in the water provides nine times the economic benefit of commercial fishing. ‘

“I like to fish because it is totally relaxing. I love the water. I can concentrate and forget all my worries. I count my blessings while fishing.’ George Bush, president.”

Participation:

44.4 million Americans ages 7 and older fish2 (An estimated 50 million fish including all age groups). One out of every six U.S. residents 16 and older fish. 1 25 percent of U.S. males fish, and 8 percent of U.S. females fish. 1 Excluding those who fished the Great Lakes, freshwater anglers account for 82 percent of all anglers. Anglers spend an average of 16 days fishing and take an average of 13 fishing trips annually. Anglers 16 and older took 365 million freshwater fishing trips in 2001 totaling 467 million days. Including saltwater anglers, 437 million fishing trips totaling 557 million days were taken. From 1991 to 1996, freshwater fishing days rose 13 percent. The average number of freshwater fishing days per angler increased from 14.3 in 1991 to 16.7 in 1996. Between 1980 and 1995, the number of Americans who fished increased 16 percent. Residents of the South provided the biggest increase in fishing (21 percent) in the United States between 1980 and 1995. The number of males fishing increased 14 percent from 1980 to 1995.

Popularity:

Fishing ranks as the 4th most popular participation sport in the nation. It ranks ahead of bicycling, bowling, basketball, golf, jogging, baseball, softball, soccer, volleyball, tennis, football and skiing. Only walking, swimming and camping are more popular. More Americans fish than play golf and tennis combined. More Americans fish than play soccer and basketball. The number of youths ages 12 to 17 who participate in freshwater fishing increased 10.9 percent since 1991 to 4.5 million. During the same period, the number of youths ages 12 to 17 who play baseball decreased 15.4 percent to 4 million. Basketball, softball, tennis and volleyball participation declined between 2 and 46 percent. Fishing ranks as the 2nd most popular water-related outdoor sport in the United States. Swimming ranks 1st. Freshwater fishing ranks as one of the top-five participation sports in 7 states. Fishing in general (both freshwater and saltwater) ranks as one of the top-five participation sports in 18 states. Fishing is the No. 1 participation sport in Minnesota, Florida, New Jersey and North Carolina.

Women and Minorities:

11.9 million women 7 and older fish. That’s more than the number who participate in jogging, basketball, volleyball, softball, golf or tennis. Freshwater fishing is the 10th most popular participation sport among women. 2 26.8 percent of all anglers are female 2 (representing 8 percent of the U.S. female population). 5 percent of all anglers are black (representing 7 percent of the black population). 5 percent of all anglers are Hispanic (representing 7 percent of the Hispanic population). The number of women fishing increased 19 percent from 1980 to 1995 compared to 14 percent for males. The region that experienced the largest increase in the number of females fishing was the Northeast. Women spend on average $246 per year for trip-related fishing expenses and $70 per year on fishing equipment for a total of $3 billion. Hispanics fish at lower rates than African-Americans and women, but they spend, on average, more money - $434 per angler for trips and $154 for equipment. Hispanics spent a total of $696 million per year on fishing trips and equipment. Fishing equipment expenditures among African-American anglers increased 43 percent between 1991 and 1996. African-American anglers spend on average $324 per year for trip-related fishing expenses and $128 per year on fishing equipment for a total of $814 million. African-American anglers spend more days fishing (22 vs. 18) and take more trips (18 vs. 14), on average, than all anglers. 64 percent of African-American anglers live in the South compared to 39 percent of all anglers. 43 percent of female anglers live in the South. 16 percent of African-American anglers live in the Midwest. 26 percent of female anglers live in the Midwest. 43 percent of Hispanic anglers live in the South. 38 percent of Hispanic anglers live in the West compared to 20 percent of all anglers. The number of days fished by African-American anglers increased 72 percent between 1991 and 1996 compared to 22 percent for all anglers. The number of days fished by female anglers increased 15 percent between 1991 and 1996. The number of days fished by Hispanic anglers remained constant between 1991 and 1996, but fishing trip expenditures increased 50 percent during the same period. 1.9 million persons 16 and older with disabilities took 33 million fishing trips in 2001, fishing for 41 million days.

Why People Fish:

33 percent of anglers fish to relax. 25 percent of anglers fish as a way of spending time with family and friends. 65 percent of non-anglers and 88 percent of anglers say that being asked by a child would make them want to go fishing or make them want to fish more often.

What People Fish For and Where They Fish:

Bass fishing is the most popular type of fishing in the United States. 38 percent of all freshwater anglers in the United States fish for black bass. 28 percent of freshwater anglers fish for trout. 28 percent of freshwater anglers fish for panfish. 27 percent of freshwater anglers fish for catfish. Bass are sought on 36 percent of all freshwater fishing days. 92 percent of freshwater anglers fish in their state of residence. 23 percent of freshwater anglers fish out of state. 85 percent of freshwater anglers fish in flat water, including ponds, lakes and reservoirs. 44 percent of freshwater anglers fish rivers and streams.

U.S. Anglers by Age Group:

17 percent of 16-to 17-year-olds fish, comprising 4 percent of all anglers. 13 percent of 18-to 24-year-olds fish, comprising 9 percent of all anglers. 19 percent of 25-to 34-year-olds fish, comprising 19 percent of all anglers. 21 percent of 35-to 44-year-olds fish, comprising 27 percent of all anglers. 17 percent of 45-to 54-year-olds fish, comprising 20 percent of all anglers. 16 percent of 55-to 64-year-olds fish, comprising 12 percent of all anglers. 8 percent of 65+ year-olds fish, comprising 9 percent of all anglers. Fishing among 35- to 44-year-olds increased 60 percent between 1980 and 1995. It was the largest increase of any group.

Economic Impact of Fishing:

Anglers spent $35.6 billion in 2001 to pursue their sport. They spent $14.7 billion for fishing trips, $17 billion for equipment, and $4 billion for licenses, stamps tags, land leasing and ownership, membership dues and contributions, and magazines. 1 If hypothetically ranked as a corporation, this revenue figure would put sport fishing at 32nd on the 2002 Fortune 500 list of America’s largest companies. Total economic output generated by freshwater fishing in 2001 exceeded $74 billion, including the impact on retailers, suppliers of goods and services to retailers, wholesalers and manufacturers, plus the indirect and induced impacts resulting from these activities. Including saltwater fishing, economic output reached $116 billion. The average angler incurs $1,046 in fishing-related expenses. Freshwater fishing expenditures in 2001 generated more than $19.4 billion in wages. Including saltwater fishing, $30.1 billion in wages were generated (up 23 percent since 1991). 683,892 full-time jobs exist due to freshwater fishing. Including saltwater fishing, the total exceeds 1 million (up 16 percent since 1991). $2.07 billion was spent on fishing tackle in 2001. Fishing tackle ranks 4th in terms of consumer expenditures for non-team sports equipment. Golf equipment ranks first followed by exercise equipment and firearms for hunting. Florida anglers spend more than $4 billion annually on fishing and related equipment. California and Texas anglers spend more than $2 billion. Angler expenditures exceed $1 billion in Michigan, Minnesota, New York, North Carolina and Wisconsin.

Economic Impact of Fishing:

U.S. Department of the Interior, Fish and Wildlife Service and U.S. Department of Commerce, Bureau of the Census. 2001 National Survey of Fishing, Hunting and Wildlife-associated Recreation. National Sporting Goods Association. Sports Participation in 2001. Future of Fishing project conducted by Responsive Management of Harrisonburg, Va. American Sportfishing Association. The 2001 Demographics and Economic Impact of Sport Fishing in the United States. Participation and Expenditure Patterns of African-American, Hispanic, and Women Hunters and Anglers. Addendum to the 1996 National Survey of Fishing, Hunting and Wildlife-Associated Recreation. Black Bass Fishing in the U.S. Addendum to the 1996 National Survey of Fishing, Hunting and Wildlife-Associated Recreation. 1980-1995 Participation in Fishing, Hunting, and Wildlife Watching. National and Regional Demographic Trends. Sport Fish and Wildlife Restoration Web site, restorewildlife.org.

Vladimir Gonzalez asked:


Australia Economy

Australia has a huge foreign and private sector department. Australia’s expanding resource sector might be one of the country’s weak points. The manufacturing sector has been shrinking in a rapid pace. The associate professor of Economics at the University of New South Wales, Peter Kriesler, thinks that the country depends more and more on the key resource exports. Australia is reliant on what is happening in countries like India and China.

The Australian Government carried out economic reforms in order to boost the country’s economy. The government companies have been privatized and the financial services have been opened, the labor markets becoming more flexible.

The International Monetary Fund considers that Australia’s current deficit will be present up to at least 2012. Like it has happened in the rest of the world, the inflation level is also growing in Australia. In 2007 it was at 4.2%. It will probably continue to be above the target of 2 or 3 per cent which had been previously set by the Bank of Australia.

Australia’s economic growth is higher than other countries in the West and this growth is based mostly on the mining sector. Attempts to reduce inflation are unequally directed at wage earners and the poor, as asset owners can take profit from the interest payments on their savings which are higher. Low income earners have more debt than they had before due to the explosion of the domestic financial sector. High interest rates would cause low income earners to suffer the most.

The largest economic sector in Australia is the services sector, which accounts for more than 70 percent of Gross Domestic Product, according to the 2007 data. Australia has rich natural resources. Since the European settlement, Australia has been cultivating grain crops. It is a big exporter of agricultural products like wheat, wool, gold, iron, coal and natural gas, sugarcane, tobacco, apples, potatoes, tomatoes, pineapples, bananas and mangoes. The country exports sugar to the United States, Malaysia, Singapore, Canada, China and Japan. Agriculture and services related to agriculture employ 400,000 people. 3 per cent of Australia’s Gross Domestic Product comes from agriculture.

Australian farmers are often affected by drought because of the El Niño-Southern Oscillation. The country has very good water resource management, maintaining productivity in agriculture. Recently, scientists at the Australian Centre for Plant Functional Genomics have been researching drought tolerant crops.

Further reading on EconomyWatch.com:

Overvierw of Australian Economy

Exports and Imports of Australia

Economic Indicators of Australia