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[RT] Re: GEN:Question for the Economists



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Gitanshu, I'll offer my reply as a counter-point to some of your arguments.
In a few areas, I believe strongly in what I've outlined below.  In other
areas, I'm taking the other side of your argument simply to add an
alternative view.  - Gary

On Apr 1, 12:20pm, Gitanshu Buch wrote:
> 
> What's wrong with the US economy growing at 7%? Why would one want to trade
> an economy that grows 7% for an economy that grows 4%?

Good question, a few observations:

1) if 7% is good, is 15% better?

2) when the economy is operating at capacity (low unemployment), will
high growth rates drive wages higher, increasing inflation, and lowering
overall real wages (and standard of living)?

3) was the growth in GDP financed by increased personal and corporate
debt?  Is debt growing faster than GDP?

4) was the grwoth in GDP broad-based, or concentrated in a few
narrow sectors (ie, computer technology)?

and some comments interspersed below:

> Follow me on this one: The way I look at it,
> At the micro level a/ High growth = high employment, better
> wealth and wealth distribution,  lesser poverty,

A good idea, but is it consistent with the facts?  Most
studies I've read show a growing disparity between rich and
poor.  And, the debt load is increasing for people at lower income
levels.  Further, many middle-class baby boomers have been
taking on more housing debt even as they approach peak
income, and near retirement. Other government stats. show
that savings have been dropping (though the measurement of
savings is open to debate).

> b/ High employment = more  net saving and/or higher
> consumption expendture

Definitely higher consumption, but per capita housing debt
has been increasing, and savings have dropped, per govt.
stats.

> c/ More saving = more investment - by sequential
> elimination from unproductive - to the most productive assets

In some circles, this is called mis-allocation of resources

Hot money chases hot money.  Should Yahoo! (YHOO) really
trade at approx. 3x the market cap. of Boeing (BA)?  Yahoo!
is generating $0.5 Bil. in sales, and earning $60M income.
Boeing is generating $58 Bil. in sales, and $2.3 Bil. in
income.  Boeing employs 195,000 people.  Yahoo! employs
2,000 people.  Which company is more important to the
US ecnomy?  Is Yahoo! 3 times more imporant than Boeing?
Are Yahoo!'s chances of continued, sustained earnings growth
3 times higher than Boeing?

> d/ More productive assets = better quality of life.

Which assets are more productive?  Are you talking about
the 'wealth effect' created by very high stock price
returns over the past 5 years, that have created an
optimism that causes individuals and companies to take on
more debt?  The question remains: how many individuals have
so far realized those stock market gains, and will they be
there when they have to sell/liquidate?

> e/ More consumption expenditure = more employment = go
> back to "a".

more consumption expenditure = more debt.  When does the
check arrive at the table?

> f/ Better quality of life = the goal for each individual.

Quality of life is difficult to measure, consider:

- in many families they have less than one month's worth of
savings, and many could not sustain being out of work for
three months or more.

- Both spouses must work to make ends meet.

- People are living longer past retirement, but the Social
Security and Medicare programs are ill-prepared to meet
their future needs. 

- Divorce rates are higher than ever.

- Schools are often in shambles, and in some areas look like a
war zone.  Ironically, many states are funding the
education system through legalized gambling (lotteries),
which is really a progressive tax on the lower-income
(people with a lot of money probably don't routinely by
lottery tickets, and if they do, percentagewise spend
a lot less disposeable income).

- The US routinely ranks in the lower percentiles in math
and science education in high school and elementary levels
versus other G8/industrialized nations.  Admittedly, this
gap appears to be partially made up by successful
'recruiting' via immigration, or as you mention, 'outsourcing'
to other countries.

> 
> So if a higher growth rate of the economic system makes all this possible,
> WHY CHANGE IT?

Good question.  Growth is good, no doubt.  The question
remains: is that growth at the expense of other desirable
attributes of society?

Are we selling future growth to buy presnt growth?

> 
> I mean, I know the effect of more money chasing constant consumables or
> assets, aka inflation. But we live in a largely market driven economy. Price
> takes care of itself through the balance of demand and supply.

This would be true if we had a true free market economy - but as long
as the Fed and the govt. can print more money and float more debt, and
the advertising media does a better and better job of increasing demand
for debatably desireable/beneficial goods/services, it isn't clear that
demand/supply is working as intended.  Have these forces combined to
create a 'bubble' that has to eventually burst?  When it does, will a
lot of people lose a great deal of personal freedom as they are forced
to turn to the government for essential support?

> 
> Doesn't it?
> 
> People prefer SUVs, so price of gasoline goes up. What's wrong with that?

People with lower incomes can't afford SUV's, but often drive older
cars with lower gas mileage, in poor repair.  They are affected
more by the increase in oil/gas prices.  Developing countries who
would benefit from cheaper oil are also disproportionately affected.

> People prefer tech stocks, so tech stock prices go up. What's wrong with
> that?

New money is flowing to
tech. and very speculative issues, driving valuations so
high they are disconnected from any possible future
reality.  At the same time, "old economy" companies are
having a tough time funding their operations.  Ironically,
the "old economy" companies are more heavily impacted by
higher rates, and by their inability to float secondary
offerings - which will probably lead to eventual defaults,
plant closings, and unemployment.  If the Fed's intent behind
raising rates is to pop the speculative tech. stock and Internet
bubble, it runs the risk of killing off the "old economy" companies
first.

Will the "new economy" stocks be able to take up the
slack?  Probably not, because ultimately they need to sell
their services directly either to the "old economy"
companies (who employ the majority) or individuals employed
by those same "old economy" companies.

> People don't prefer Coke growing at a stable 6%, so price of Coke stock goes
> down. What's wrong with that?

(in my opinion) Coca Cola's (KO) stock is still
overvalued.  At its 52-week high, set a year ago at $75
(approx), KO was probably trading at a price-sales ratio of
approx. 10, and a dividend yield of 0.5%.   Today, at 40%
off its 52-wk high, KO is still selling at a P/E of 50 (per
marketguide, though Zack's shows 37), and a price-to-sales
of 5.   By the way, Zack's shows consensus earnings growth
for this year to be 12%, and 14.1% for the next 5 years.
Still, this gives KO a PEG of 3, which is well above the
S&P 500, yet the S&P 500 is projected to grow earnings +15%
annualized during the next 5 years.  Bottom-line is that KO
needs to drop another 50% in price to be competitive with
the S&P 500 on a price basis (though it is a judgement call
as to which earnings growth estimate is more reliable).

> 
> People prefer growth.

I prefer _real_ growth, but admit that I don't know how to
measure it, and apparently neither does our government.  I
prefer policies that invest in things like education and
infrastructure, and that promote broad-based growth without
massive increases in private or public debt.

We quickly run into definitional problems.  Case in point:
I recently saw a special on TV, which showed a typical
inner-city school, where they had closed down a
multi-purpose room because the roof was leaking badly and
could not be fixed due to lack of funds.  Yet, becasue of a
recent federal government grant they had the latest in Internet
hook up and PC's.  This 'tagging' of funds creates some
preverse mis-allocations that even Kurt Vonnegut would have
had a tough time imagining.

> 
> Would you, regardless of whether your compensation was a function of growth,
> choose to work for a company that grew 3% or a company that grew 7%?

If the company is growing at 7%, yet tripling its debt exposure at the
same time, I might think twice.

> 
> If the company that hired you couldn't continually grow faster than
> competition, what would your chances be of sustained employment in that
> company?

If the other company is taking on debt, and burning through
cash, such that it likely goes out of business in the next
two years, I'm not too worried.

> 
> If you the employee became a victim of technology's obsolescence, wouldn't
> you the employee learn to adapt, acquire new skills or find another company
> that needs your skills and grow from one job to the next?

I'm trying to imagine how a worker in a Boeing manufacturing plant
retools his education so that he can get a job with Amazon.com,
or Yahoo!  I note that a 10% reduction in Boeing's work force is 20,000
people, and this is 10 times the total number of employees at Yahoo!

> 
> To me, the choice one makes between keeping my job, having a raise, working
> in a company that grows faster than competition AND paying more for a gallon
> of gasoline and a box of cereal  VERSUS being unemployed, poor and
> unmotivated = a no-brainer.
> 
> So why bother interfering with a good thing?

Here, we have a point of agreement.  _Why_ did the Fed jump
in and _save_ the market in 1997 (Asia crisis), and 1998
(LTCM crisis)?  Did this intervention artificially sustain
an economic expansion that probably could have used a 'reset'
(or at least a rest) to consolidate gains, and possibly,
reallocate assets to more productive purposes?  Did this
intervention create an imbalance that substantially
increased the risk in financial and real-estate markets?

Only time will tell.

> 
> Do we seriously believe that governments, or quasi-government agencies like
> the Fed, can control a larger marketplace? 

No, but apparently the Fed can affect investor psychology.
If the generally held opinion that the Fed will step in and
save the market by quickly lowering rates and increasing
liquidity is true, then a (potentially) false sense of
security is created.  This unrealistic assessment of risk
causes individuals and institusions to over-allocate funds
into financial assets, and in some cases to speculate
unwisely.

> The message from the currency
> markets has time and again proven that these effects are marginal, and short
> term at best.

Possibly.  But we need to ask, what role did the IMF play?
Did the 'easy money' created by readily available funds
ultimately lead to unsustainable growth rates, corruption,
over-building, and the lack of prudent investment in
infrastructure?  Will the defaults that eventually followed
in Southeast Asia, Brazil, and Mexico (to name a few) lead
to an effective higher debt load on US citizens, or worse
yet, an ultimate massive devaluation of the dollar?

Would a devaluation erase most of the gains of the past 15 years?
What will be the price of oil (and other imports) be then?