Economic Commentary: For November 13, 2006
(see all comments at www.myownfund.com)
http://www.montie.com/upload/3/dailycommentnov132006.pdf
We Live In A Global Economy
The U. S. economy is the major market in the global economy, and the major players of the global economy are the 1500 largest corporations. Many of these large corporations may have their world headquarters in the U. S., but their markets and operations are global, and so is their perspective on rules and regulations.
In the internationalist economic context, the Keynesian policy influence of the Democrat-controlled U. S. Congress on these major players is limited, and the effects of any new tax and spend programs on domestic economics will be marginal.
Can Anyone Steer This Economy?
So asks Michael Mandel, chief economist at BusinessWeek, in his cover story for November 20, 2006. As he reports, ?Since 1995 imports have risen from 12% of gross domestic product to about 17%. And foreign money finances about 32% of U.S. domestic investment, up from 7% in 1995. In other words, the U.S. is more open to the global economy than ever before, and the links run in both directions. Now many of the levers affecting the U.S. economy are located not in Washington but in Beijing, London, and even Mexico City.?
“Traditional macro policies are less effective than they used to be,” says Robert S. Shapiro, a top economic adviser to President Bill Clinton who now runs a Washington economic consulting firm. “We dont know how to ensure strong job creation and strong wage growth anymore.”
“The era in which we could assume that increased U.S. public investment in r&d automatically generates domestic growth is over,” says Jeff Faux of the liberal Economic Policy Institute.?
The Domestic Economic Sources of Investments and Savings
Many years ago, in the halls of economic academia, a new theory cropped up that related the investment and savings of a domestic closed economy to future economic performance of the country. The unstated premise of the new idea was that the source of the savings would generate economic growth in the geography of the country.
As noted by Mandel in his article, “What starts to break down is the simple link between encouraging savings and encouraging investment,” says James S. Poterba, a Massachusetts Institute of Technology economist appointed by Bush to his tax reform commission in 2005. “If Joe in Pittsburgh saves, we cant say that we benefit this factory in Harrisburg. The jobs we generate might be jobs somewhere else”–like overseas.?
Domestic Consumer Savings Take A Back Seat to Profits
What Joe in Pittsburgh does with his meager savings in not really very important as a source of capital for investing. However, Joe and his savings are the primary target of the Democrats economic policy focus, since Joe just elected them.
The really important source of capital is seen in the graphic below, from the U. S. Small Business Administration:
Many are Called, Few Are Chosen
The Wall Street Journal today weighs in with the important economic data that just a few industries, and even fewer corporations within those industries undertake the bulk of investments in technological innovation in America.
When and where these industries and companies decide to invest capital is much more important, economically, than what the Democrats do with Keynesian tax and spend policies in the next 2 years.
Mandel, at BusinessWeek, cites economist Daron Acemoglu of MIT, the most recent winner of the John Bates Clark Medal. “The U.S. is a frontier country,” says Acemoglu, meaning that its competitive advantage comes from being at the forefront of new technology. As a result, he says “if any policy is going to have a beneficial effect, it has to help the innovation sector.”
The smartest economic policy that the Democrats could adopt, and soon, is one that promotes domestic capital investment in domestic technological innovation. That policy would require, however, a value orientation to individualism, not internationalist collectivism.
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