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Robert M. Liu

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8/24/2003 11:16:09 PM    [ Flag as Inappropriate ]

Originally posted at Roundtable, this note touches on the economy, California's business environment, and Dr. Howard Dean's prescription for economic recovery.
(1) The economy:
Recent data (e.g. retail sales up 1.4% and housing starts up 1.5% in July, initial jobless claims below the 400,000 level in the latest week, etc.) seem to indicate that both the economy and the jobs market have stabilized.
However, as businesses remain cautious about capital spending and staff hiring before they see clear evidence of strong demand growth, the economy's ability to create new jobs is likely to be anemic for a while.
As always, employment is a lagging indicator of business activity, whereas the stock market is a leading indicator. One has to allow businesses to make money -- lots of money -- first, before one can even expect them to hire new staff.
That doesn't sound like a "humanitarian process" but is how the economy operates. Business is not charity. It is about making money, not humanitarianism. Like it or not, that's an economic reality. In addition, businesses are the government's customers. If they feel the government is unfriendly, they leave.
(2) California:
Perhaps, to leave is exactly what some Californian companies are thinking about right now. According to a recent survey, one fifth of Californian companies have plans to either expand or move their plants outside California, because of the state's high costs and excessive regulations.
A few left-wing forces in California want to burden businesses with more costs. For instance, there are three job killers in California: 1. the employer-paid family leave act; 2. a government measure raising unemployment insurance; 3. a government measure boosting workers' compensation benefits. 
Well, what else could one expect from a state where both the executive branch and the legislative branch are controlled by left-wing Democrats? In California, when the Democrat-controlled legislature passes business-unfriendly regulations and taxpayer-unfriendly spending bills, Governor Gray Davis (D) just signs. Hence, a $38 billion deficit.
Yet, Governor Davis says the economy in his state is under recovery. That's good news. California is part of the U.S. national economy. If California's economy is under recovery, it must be a sign that the national economy is under recovery too, contrary to left-wing critics' claim that the Bush tax cuts don't work.   
(3) Dr. Howard Dean's prescription:
Democratic presidential contender Howard Dean had his long article published in The Wall Street Journal, Friday (Aug. 22, 2003), in which he provides his prescription for economic recovery. He claims the Bush tax cuts are the cause of the economic sluggishness during which 3 million jobs have been lost. His prescription: to repeal the 2001 and 2003 tax cuts and use the money to help small business and low-income people.
As we know, Howard Dean is a physician and was governor of Vermont for 11 years, during which, he kept his state's budget balanced. Now, he says he would make federal government budgetary balance a priority if elected.
This makes one wonder: Since when has Howard Dean become an economist? And what economics textbooks does he read, which prescribe federal government budgetary balance and high taxes as a cure for economic sluggishness?
It is worth noting that the law requires state governments, not the federal government, to have balanced budgets. There is a reason for that. While the federal government has a money creation mechanism called the Federal Reserve to meet its borrowing requirements, state governments don't.
In other words, depending on circumstances, the federal government is allowed to have deficits, even very high deficits, financed by loans from either the Federal Reserve or the public. As an economist (i.e. if he is), Howard Dean should look at the circumstances and beware of economic dogmatism.
Current circumstances such as the expensive war on global terrorism, high federal spending on defense and homeland security, economic stimulus packages like tax cuts to encourage capital spending and staff hiring, etc., justify high federal budget deficits. After all, the projected fiscal 2003 federal deficit of $455 billion accounts for only 4.5% of a $10 trillion GDP.
In 1943 when America was in the middle of World War II, the federal budget deficit accounted for more than 30% of GDP. But life went on. Of course, those high war-time federal deficits had their consequences, namely, inflation.
In 1934, gold was worth $35 per troy ounce. By the 1970s, gold traded above $300 per ounce. Wars (like WWII, the Korean War, the Vietnam War, the Cold War) are expensive and usually lead to federal deficits, which if excessively high could cause inflation.
Right now, there is no inflation -- an indication that current federal dificits are not excessive at all. Instead, the Federal Reserve is concerned about inflation falling too low. So why must America balance the federal budget right now when it is in the middle of a global war on terrorism -- except for partisan bickering reasons?
Dr. Dean should either spend more time in the library, or tell us what economics textbooks or Nobel laureates in economics recommend budgetary balance and high taxes as a way to cure economic sluggishness and stimulate economic growth and job creation. At least, my textbooks recommend the exact opposite.
Finally, just a question of curiosity: Has the term "American democracy" become a euphemism for American demagoguery? If not, why is it that proven economic theories recorded in classic textbooks frequently get hammered by politicians with unheard-of "theories" which will certainly scare Wall Street and destabilize the economy?
Robert M. Liu

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More Blogs by Robert M. Liu
• A Man Is Known by the Company He Keeps - Thursday, October 09, 2008
• A Simple Quick Fix for the Crisis - Thursday, October 09, 2008
• A Commentary on Issues of Current Interest - Sunday, December 02, 2007
• A Bit of History to Illustrate the Consequences of Treaty Breaches - Sunday, November 05, 2006
• A Couple of Historical Parallels and Other Issues - Thursday, November 02, 2006
• A Debate Plus a Dilemma - Saturday, December 10, 2005
• A Tale of Two Sides - Thursday, November 10, 2005
• A Bit of History to Illustrate the Role of China's Military - Sunday, October 09, 2005
• An Anachronistic System - Thursday, September 08, 2005
• Is President Hu Jintao in Control? - Tuesday, August 09, 2005
• If I Were a Unocal Shareholder... - Thursday, July 07, 2005
• China and North Korea - Tuesday, June 07, 2005
• A Culture of Obstructionism - Tuesday, April 05, 2005
• American Capitalism - Monday, March 07, 2005
• Another Turn for the Better - Tuesday, February 08, 2005
• A Set of Interesting Historical Parallels - Saturday, November 13, 2004
• A Shamelessly Sophistic Debating Technique - Monday, October 11, 2004
• A Campaign in Disarray? Probably -- Plus Campaign Issues - Monday, September 13, 2004
• A Campaign of Tortured Arguments - Tuesday, August 10, 2004
• Does It Add Up? - Monday, July 12, 2004
• A Turn for the Better - Saturday, June 12, 2004
• Amazing Poll Results - Monday, May 10, 2004
• Voodoo Politics - Tuesday, April 06, 2004
• Ambivalent Mind Set - Thursday, March 11, 2004
• A Message to Lawrance G. Lux - Friday, February 27, 2004
• A Message to Lawrance G. Lux - Friday, February 27, 2004
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• Al Gore's Judgement and Luck - Sunday, February 08, 2004
• Strategies and Schemes - Wednesday, December 31, 2003
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