Kimball Corson
11/14/2009, Neiafu, Vava'u, Tonga

Harold Bloom, America's premier literary critic and a professor at Yale, has said that, for sheer cognitive power only Emily Dickinson can rival Shakespeare at his best. Emily is truly powerful, mentally. Bloom has said that after teaching a class on her poetry to graduate students, he is always exhausted. She is an original American genius who stood in no one's intellectual shadow, which is extremely hard to do. Most great literary figures reflect in their work the subtle or not so subtle influences of other literary masters. They suffer from what Bloom has called, the anxiety of influence. Not Emily. She was a true original, which is so hard to be.

Unlike Shakespeare, who had no college or university training, Emily attended Mount Holyoke for a year. In studies requiring verbal skills, she was most advanced. In math and the sciences, she solved problems correctly and quickly, but in most unorthodox ways. Her father, a successful lawyer, was one of the original founders of Amherst College.

In all of literature, I most enjoy Emily Dickinson, but she is hard to get a handle on because she uses the language in her own more powerful and unique way. It is really dazzling.

While she lived, only her brother, who predeceased her, could comprehend and really understand her. The rest were left behind. I personally believe she had an incestuous relationship one summer with her brother. Emily clearly knew no boundaries.

Here is the only photograph of her that is known to be authentic. It was taken at or about the time she attended Mount Holyoke.

Emily is a real heroine of mine. Here is a sample poem, which like all, is untitled, but numbered -- no help to be had there:

761.

From Blank to Blank -
A Threadless Way
I pushed Mechanic feet -
To stop - or perish - or advance -
Alike indifferent -

If end I gained
It ends beyond
Indefinite disclosed -
I shut my eyes - and grouped as well
'Twas lighter - to be Blind -

Even her rules of capitalization and punctuation were her own and not at all random, either.

While Emily was fully aware of where she placed prospectively in the pantheon of poetic genius, she still had the humor and margin to write:

288.

I'm nobody! Who are you?
Are you -- Nobody -- Too?
Then there's a pair of us!
Don't tell! they'd advertise -- you know!

How dreary -- to be -- Somebody!
How public -- like a Frog -
To tell one's name -- the livelong June--
To an admiring Bog!

Emily was a serious amateur botanist as well. If you have ever heard a bog with frogs in June, you know what an incredicle racket they can made. Clearly, Emily thinks many people have too high an opinion of themselves.

Emily's poems were not published during her lifetime. Shortly thereafter, interest arose and the poems were published, invariably with editors who did not understand her and changed her punctuation, capitalizations and sometimes even her wording. We know better now, but it took a while and some smart literary critics to figure it out.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

What is the addition here -- a wire run?
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Why Consumption Expenditures in the U.S. Are Not Recovering Quickly

Why are consumption expenditures not recovering quickly in the U.S? In other words, what has happened to the country's consumers? This question in turn requires us to consider what has happened to the income of most American consumers? Clearly, on average, it has not risen during the recession. Absolute numbers are less meaningful here than relative numbers because they better show why national consumption has not recovered quickly. They also better reflect the results of U.S. government action and inaction, as I will explain. The relative numbers are found in the distribution of income. So our questions, as we frame them, are what has happened to the distribution of income in the U.S and with it consumption expenditures by the American consumer?

I. The Background

The truth is we don't specifically know, even though Congress has responsibility for, and absolute control over that distribution and its impact on consumption, as I explain below. The impact of the recession on income distribution has not been determined yet, amazingly enough, but we know the impact is serious and adverse and anecdotal evidence is certainly not only suggestive, but devastating: people not having enough food at the end of the month, as Walmart executives are saying. Worse, a report was released in the last day or so (Nov 16th) saying that 49 million Americans, or almost 1 in 6, are not getting enough food to eat regularly. That is how bad the situation is. A teacher in a U.S. elementary school asked a young boy what he had for breakfast that morning and he said, "Nothing. Today is not my day."

We also know that back in the good times of the 2007 housing bubble, the situation was not very good, largely due to government inaction on the matter. It looked like this:

Aggregate U.S. Household Income Distribution, 2007
Percentage of Total US Household Income by Income Groups
3.1% of income --- is less than $20k, 19% of households
8.1% of income --- is $20k to $37.5k, 19.5% of households
13.8% of income --- is $37.5k to $60k, 19.4% of households
22.3% of income --- is $60k to $90.5k, 20% of households
40.8% of income --- is $95.5k to $250k, 20.2% of households
11.9% of income --- is $250k or more, 1.9% of households
Bur. of Census See also http://en.wikipedia.org/wiki/Income_distribution

This distribution of income large reflects not the recession, but the impact of government or the lack of it on the distribution of income. As we can see here, back in 2007, the top 22% of all households walked away with 52.7% of all the income, leaving the bottom 78% of households with 47.3% of the income.

Worse, if we look at the bottom levels of households earning less than $60,000 a year, there were 58% of the households in that category in 2007 and they took home only 25% of the income. And this was in 2007, when times were booming from the housing bubble.

II. The Impact of the Recession on Income Distribution.

My best guess is most of the 17.5% to 20% of true unemployment we now have arises in this bottom almost 60% of households. Indications are that the results of the recession have been devastating in that quarter, as food retailers and other data indicate.

To try to get a fix on just how bad the current income distribution problem might be, consider this crude estimate. Assume that all the unemployment is concentrated in the 58% of households that were earning less than $60,000 a year, that the unemployed earn nothing and that the unemployed used to earn the average income for that 58% of the households. Then almost 60% of households now command 17.5% to 20% less of the income they had or about 20% and the top 42% of households now gets 80% of all income. That is down from 25% for the bottom end. My guess is that, with this recession, these results might really be pretty close to the mark, if they are not optimistic. I say optimistic because incomes have probably fallen proportionately more on average at the bottom end than the top due to other aspects of the recession.

That almost 60% of all households might be getting only 20% of the income now generated in the U.S. is flatly outrageous. The middle and lower classes should be in revolt. Nicely enough for peace and quiet, no data are available so the middle and lower classes do not know collectively how bad off they are in fact. But we are seeing anecdotal evidence of it that supports this estimate. With less income, it is not surprising that consumption expenditures are not recovering quickly, especially if many consumers are trying to increase their savings to pay down their debts or to develop a safety margin.

III. The Impact of Government on Income Distribution


But it is not just this recession that has made things harder on the lower and middle income classes. Problems were in the wind earlier, with the rise and domination of heavy lobbying of the federal and other governments, and Congresses lack of attention to the distribution of income. For the pre-2007 period, we do have data which is reliable. See the block charts at
http://en.wikipedia.org/wiki/Household_income_in_the_United_States.

The income distribution has become more badly skewed since before 1970 to the about 2007. Real income is almost flat during this period for those in and below the 60% percentile, but above that, incomes have soared, particularly in about the 90th percentile and above, where they have tripled since 1950. And these are inflation adjusted dollars, too.

This is significant. In the last 20 years or so the income distribution problem has deteriorated and with it the U.S. consumer base, which was bolstered for too long by heavy consumer borrowing, as consumers most in the lower 60% tried to keep up. Congress has done next to nothing about the distribution problem. The recession has simply compounded an already serious distribution problem.

The three major consequences for the economy of this deterioration in the distribution of income are:
1. the consumer base in the U.S. and therefore consumption expenditure has markedly deteriorated --

a. because the majority of Americans have less income to spend, that is, they have a smaller share of a shrinking income pie, and

b. because higher income households spend a much smaller percentage of their income on consumer goods and services than lower income households, that is, their average propensity to buy especially consumer goods is less,

2. much more income and dollars are now being rerouted into secondary financial markets, worldwide, by these higher income families that do not use most of their income for consumption, driving those assets prices up worldwide, and

3. government programs to stimulate and aid consumption and aggregate demand are not getting enough traction where it matters to seriously jump start the economy. It is not helping the lower 60% enough to seriously raise their consumption expenditures, given the income distribution we now have.

The economy is becoming ever more dysfunctional because of these problems, but especially the first one. The distribution of income problem is the reason the consumer base in the U.S. has become more impaired and government stimulus efforts don't have the affects we hope for on consumption. Domestic aggregate demand is seriously suffering, but financial markets are near their highs. We almost have deflation in consumer goods prices, but inflation in financial asset prices. No surprise.

A reasonable and more normal distribution of income, considering the longer historical U.S. record and how the economy has fared at various points and factoring out the excesses, should look something more like this:

bottom 20% ----------- 8% of income,
next 20% up ----------12% of income,
middle 20% ----------- 21% of income,
next 20% up ---------- 25% of income, and
top 20% ----------------34% of income.

This would be much more sensible and much better for the economy and consumption expenditures. It shows us how far out of wack the current income distribution has become.

IV. The Mechanism of Trickle Up Economics.

What has happened is the well-to-do in Congress and government have taken care of themselves and their wealthy, solicitous and well-lobbied for friends by using government to afford the upper half of the income distribution financial and other economic benefits at the expense of the middle and lower classes. Congress adopts laws and regulations are promulgated to help special interests at the expense of everyone else. Remember the tax breaks for the rich and the virtual elimination of the estate tax? Those were only the more obvious and conspicuous efforts of lobbying. Others are less obvious, but far, far more numerous.

Significant income advantages are acquired by lobbying Congress and the top half of the income distribution does it real well and often. This has materially aided the skewedness of the income distribution in the U.S.
The distribution of income and changing it is what lobbying is all about for the most part, but it is rarely perceived that way. Congress has too largely sold the American people out, to expand its own powerbase, increase the size of government and increase the wealth of its members and supporters. Congress is somewhat of a millionaires' club taking care of its own. Those newly elected to Congress may arrive poor, but they rarely leave that way after many terms in office.

The game has been going on for years. The lobbying that has been going on so long and intensely is certainly not for nothing. You don't hire expensive lobbyists expecting not to gain, and usually , financially. Little lobbying is for the general welfare of the people. We see in substantial part the results of lobbying above in the 2007 to the extent they differ from the suggested norm. The recession has just worsened things for the bottom half in particular, but they were already in bad shape before the recession. And, of course, the gains for the upper half have come largely at the expense of the bottom half. The lower 60% of the income distribution have too little income to support substantial consumption expenditures and the upper 40% spend too low a portion of their income on consumption. Consumption expenditures have therefore dropped, worsening the recession, and creating a vicious circle.

V. What Congress Has Impaired, It Can Fix.

Congress has absolute and complete control over the distribution of income, but it lets lobbying have its way too much and we see some of the results. Under the Sixteenth Amendment to the U.S. Constitution, the federal government is charged with the power to tax and spend money, subject to the limitation that it be for the General Welfare. (See also, Sec. 8 of Article I to similar effect.) Clearly, Congress is not watching out for the general welfare of the people in regard to the distribution of income and thereby protecting America's consumer base and national consumption expenditures. It is too much pandering to special interests and has been for years.

Unfortunately, almost no one in government wants to pay attention to the income maldistribution problem, which reflects these structural difficulties. The distribution of income has the major policy implications I have described, but they are just being ignored. Of course, policy and law makers and those they pander to are the beneficiaries of this travesty, so the problem being ignored should come as no surprise. Perhaps the economic consequences I note above will force Congress to address the problem when it realizes it really has no long run alternative to permanently improving national expenditures on consumer goods and services. Another bubble, like housing, won't do. Too, Americans can no longer float a lot of personal debt to hold up their consumption expenditures as they did for a while.

By the tax system and perhaps a negative income tax, Congress could correct the problem and it effects pretty quickly, if there were a will to do so. So far, there is none.
_________________________________

Comment: I have posted this article in various forms and with many revisions, but the editors of seekingalpha.com won't publish it. It is a serious and important article, but obviously deals with very sensitive issues the upper income classes, my audience, do not wish to hear about. I have submitted it in the present form, but do not have much hope. My other articles get snapped up quickly. Update: rejected. So I submitted the following massively revised version instead, in the hope I can slip it in and by:
_____________________________________

Why the Economy Is Not Improving Much

Most economists and too many policy makers are ignoring what I think is the core reason the economy is not improving much. The real reason consumption expenditures and the economy are not doing well is found in the current distribution of income in the U.S. Let me explain. According to the Bur. of Census, in 2007, during the good times of the housing bubble, 58% of households got only 25% of the income. Bur. of Census data at http://en.wikipedia.org/wiki/Income_distribution. That was not much. Now, the situation is worse.

If we assume real unemployment of 17.5%, and assume that the unemployed have no income and came from the bottom 58% and that they used to earn the average of those in and below the 58th percentile, then we can determine now, with the recession, the bottom almost 60% are getting only about 21% of the income, instead of 25% and the upper 40% is getting 79% of it.

This is a major problem too many do not address. Here is why it is a major problem. The three major consequences for the economy of this deterioration in distribution are:

(1) the consumer base in the U.S. and therefore consumption expenditure has markedly deteriorated

(a) because the majority of Americans have less income to spend, that is, they have a smaller share of a shrinking income pie, and

(b) because higher income households spend a much smaller percentage of their income on consumer goods and services than lower income households, that is, their average propensity to buy especially consumer goods is much less,

(2) much more income and dollars are now being rerouted into secondary financial markets, worldwide, by these higher income families that do not use most of their income for consumption, driving those assets prices up worldwide, and,

(3) government programs to stimulate and aid consumption and aggregate demand are not getting enough traction where it matters to seriously jump start the economy. It is not helping the lower 60% enough to seriously raise their consumption expenditures, given the income distribution we now have.

The economy is becoming ever more dysfunctional because of these problems.

Too, the anecdotal evidence is not only suggestive and supportive, but it is devastating as well: people not having enough food at the end of the month, as Wal-mart executives and other food retailers are saying. Worse, a report was released in the last day or so saying that 49 million Americans, or almost 1 in 6, are not getting enough food to eat regularly. A teacher in a U.S. elementary school asked a young boy what he had for breakfast that morning and he said, "Nothing. Today is not my day." That is how bad the distributional problem is.

Congress has been taking care its members and the well-to-do, with their highly paid lobbyists, for so long, the income distribution has thereby become badly skewed. The tax cuts for the rich and the virtual elimination of the estate tax are only the more conspicuous and recent examples. Income is skewed so badly now it is to the point where in my opinion, the country, with the governmental regulation we have, can no longer function well as a capitalistic, entrepreuerial society.

Until we collectively address this point and our huge trade deficit I think we are going to stay largely stuck where we are or close to it. Only Congress can fix this problem by using the tax system and possibly a negative income tax to correct the maldistribution. Until then, we will just have to wait for the next bubble to feel good for a little while.

We are in a major jam that is different than most recessions we have encountered, but on the fiscal side we tend to think only of orthodox solutions and are not as inventive as we have been on the monetary side.


Comment Victory at last! This haircut version was published by the editors and is drawing favorable comments quickly.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

A touch of elegance; almost oriental.
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How the Fed Is Financing a Worldwide Financial Asset Bubble and Its Impact on the Dollar

From several comments to articles about the worldwide asset price bubble, and from some of those articles, too, I observe considerable confusion about how the asset price bubble is being financed and how it impacts the dollar. Many think that, inasmuch as virtually no one in the U.S. can borrow at reasonable rates, the carry trade and therefore the asset bubble cannot exist. Others believe that a large carry trade in dollars necessarily means there is downward pressure on the dollar. Neither is true. I explain.

As part of its quantitative easing and low interest rates policies, the Fed has targeted its purchase of $1.25 Trillion of agency mortgage-backed securities for the period from January 1, 2009, through the end of the first quarter of 2010. It is on track. Over the same time interval, the Fed is buying $175 billion of other U.S. agency debt. In roughly the first three quarter of 2009 or through October of 2009, the Fed also bought $300 billion of U.S. Treasuries, clearly increasing the money supply by at least that amount. So does the purchase of agency debt if it is backed and authorized by the federal government and new dollars are used to buy it.

These are the sources of dollars for not only the carry trade, which by definition requires borrowing dollars or leveraging, but also for dollars that can simply be exported to seek higher earnings abroad by those who own them and previously held Treasuries or agency debt.

By themselves, these exports of dollars would seriously depress the dollar. However, there is a countervailing consideration. When the foreign central banks receive dollars for their sales of local currency to invest, they typically turn around and buy Treasuries with those dollars which neutralizes the downward pressure on the dollar. The net impact on the dollar from this source is essentially zero if the flow in each direction is the same. But there is the rub.

Although the U.S. is the biggest player by far, other G-20 nations also have low interest rate policies and are also using quantitative easing. For example, the E.U. is likewise financing the worldwide asset bubble and in the same way. But when Euros are transferred abroad for higher returns to buy local currencies, the foreign central banks may or may not purchase all Eurobonds. They might purchase some Treasuries as well. Or they might buy more Treasuries than Eurobonds. Factor in all the nations using some variation of low interest rates and quantitative easing and you can see there is considerable slippage regarding not only what happens to the dollar, but also to the Euro, as well as to the other currencies. Of course, other economic factors likewise affect these various exchange rates.

These currency flows can make it very hard on foreign central banks in high return countries. Brazil, for example, is using its exchange controls to block many such capital transfers seeking higher returns. It does not want asset prices to bubble up and returns drop in its country. Australia recently created a ruckus when it decided to raise its interest rates, but unlike many nations Australia has resisted quantitative easing and now faces a solid upturn in its economy.

Leveraging and the carry trade are not the only means by which the worldwide asset bubble is being financed. The impact on the dollar from that financing is likewise variable. The basic source of the moneys used to push up world asset prices and lower their returns is the governments of the world using longer term low interest rate policies and quantitative easing.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

On a pole mounted step down transformer.
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Interest Rates Do Not Equalize Savings and Investment

Savings and investment are flow variables in Keynesian models that are brought into balance by the interest rate so that the quantity of dollars saved is equal to the quantity of dollars invested, at any particular level of GDP. That is the orthodoxy and it is well received. It is also flatly wrong, I submit.

Consider sample households, some in the lower half of the income distribution and the others in the upper half. Let us look at how they typically dispose of their income these days. Households in the lower half spend most of their income on consumer goods and services, saving a portion usually to help pay off their debts. How much they save has little if anything to do with any interest rate, except perhaps the onerous ones being charged on a portion of their debt, e.g., credit card debt. These rates, in turn, have little to do with anything but opportunistic usury.

At the other end of the income distribution, the richer households have a lower average propensity to consume and put a much higher proportion of their income into secondary financial markets, also with little regard for interest rates. In fact, if stock prices are high and rising, with lowering returns, they are inclined to invest more in secondary markets in order to ride the trend. The relationship between savings and interest is then turned on its head for a large portion of the GDP, given the skewed distribution of income in the country.

Obviously, income much more determines the levels of savings than interest rates and by a very wide margin at both ends of the income distribution. But worse, savings can increase more, the faster and higher secondary asset prices rise and the lower is the return on them, at least within a broad range and for a lot of the time.

Alternatively, say both sets of households decided to save more in case the recession worsens, i.e., GDP and their incomes fall. Putting a portion of their incomes into bank savings accounts almost guarantees the money will not be loaned out for original investment in bad economic times. It will likely be used directly or indirectly for bank investments in the secondary financial markets as well. Again, interest rates or returns have little to do with it and the relationship can actually be turned on its head again. High and rising prices implying lower returns with even greater secondary market investments, of course, to a point.

The notion that an interest rate has any real bearing here is largely ludicrous. Indeed, moneys that might have been used for original investment are often diverted often into the secondary financial markets in ever larger quantities the lower is the interest rate and the faster financial asset prices are rising, exactly the opposite of what the Keynesian models suggest.

At least in a poor economy, original invest is minimal and substantially interest inelastic. Savings, on the other hand tends to increase as interest rates fall and financial asset prices rise. But is it any different in good economic times?

Original investment may well be higher and more interest elastic in good times, but savings can well have the same inverse relationship to interest rates noted above. There is no reason whatsoever to believe that interest rates will equalize the amount of money originally invested with that saved. None at all.

The Keynesian model supposes people save by either direct original investment or by putting their money in institutions that immediately do so and that they save more, the higher the interest rate. Those making original investments, on the other hand, consider carefully the return on that investment compared to the interest rate they must pay for the money to invest. That is, most simply, Y = C + S and S = I, where Y is income, C is consumption and I is investment. The interest rate equalizes I and S.

Only in these incredibly naive and rarefied circumstances, where everything else is equal, does the Keynesian model have any credibility at all in regard to savings and investment. Too much is patently ignored. Given the collateral affects on the economy of secondary markets (via wealth and other affects) and the impact on those markets of Fed and governmental policies, all savings not directed into original investment cannot simply be chalked up to hoarding.

The situation is much more complicated than that, in both good times and bad. The equations above have to be opened up to the secondary financial markets. Once that occurs, trends in those markets and the manner in which they compromise those markets destroy the Keynesian models. See my articles here entitled Good Picks Can Be Clobbered by Trading Trends and How Trend Trading Compromises the Market for further background. Trends occur most of the time that secondary markets are rising or falling, that is, virtually all the time.

Just as Says Law fails in regard to equalizing production and consumption, the same type of variability destroys any presumed equality of the amount saved and the amount originally invested, interest rates notwithstanding. This is largely rendered true given the existence huge of secondary financial markets, the amount of income going into them and, indeed, the typical inverse relationship between asset returns and the demand for them in those markets much of the time.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

All in a row.
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Why a New Stimulus Package is Premature

The reason is simple. We have not implemented most of the last stimulus package, yet. Very few project funds have been awarded and paid out for work in progress, excluding the $83.8 billion in tax benefits. See, http://www.recovery.gov/Pages/home.aspx.

Of the total of $787 billion authorized as the stimulus package, more formally known as the American Recovery and Reinvestment Act of 2009, only $194.5 billion has actually been paid out by all means whatsoever, that is only about 25% of the funds authorized. If we exclude tax benefits from this figure, only $110 billion of the stimulus package or about 14% has actually been paid out for projects as of the end October 30, 2009.

But this tells us nothing about how the projects are coming along. On that score, a pie chart shows us the number of stimulus projects in the program which have been completed, started but less than 50% completed, started but more than 50% completed and not started, as measured by on-going work in progress payments. The data are shocking and set out below:

4,110 Completed
25,932 Less than 50% complete
5,063 More than 50% complete
21,881 Not Started

Of the total projects slated for the stimulus program, the vast majority are either not started or less than 50% complete. Less than 8% are completed. Almost 40% are not started. And over 45% are less than 50% complete.

Surely, we don't need a new stimulus program until we have implemented and tried this one.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

At almost mid day.
______

The Problem with Too Many Republicans

As a Republican mouthpiece, FOX is not worth watching and it is only barely worth talking about. Hannity seals the argument. Much of the programming is just preaching to the choir.

There was a day many years ago when Republicans did stand for sound business practices and plausible economics. Those days faded with my childhood and I am almost 70. Now, one can only sympathize with the remaining reasonable, moderate and informed Republicans.

Today, Republican economic illiteracy in Congress significaantly exceeds that of the Democrats, especially when judged by spoken inane comments. I see four reasons for this.

First, much of the problem arose when the religious right came out of the closet, joined the Republicans and showed them it was alright to lie about anything as long as you got what you wanted, because after all they were doing God's work, and what can trump that?

Secondly, the joinder of the religious right brought Republicans a simple and simple minded mind set that just doesn't fare well with more complicated issues, especially those involving business and economics.

Thirdly, another part of the problem arose when fewer Republican candidates were drawn directly from the business community and instead came more from the general community.

Finally, I think fringe-right talk show hosts and commentators provide training and direction to Republican candidates, showing them which postures seem to work politically with voters and which don't.

Now, the situation is more sad and pathetic than not, especially in regard to its implications for America. The good guys seem too much out numbered

Comment to post by Paul Krugman in N.Y. Times.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

In the Third World, construction proceeds slowly, in fits and starts as money becomes available.
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What If and Is It Too Late? The Infrastructure Rebuilding Program and a WPA

What if Obama had really gone forward with his program to rebuild America's infrastructure that was a major part of the original stimulus package, but somehow largely got derailed? What if, instead of paying and then rolling over most unemployment benefits, the administration had adopted a Work Projects Administration (WPA) type of program to employ such welfare recipients and implement rebuilding America's infrastructure under the stimulus program, largely along the lines of what was originally planned.

I think the answer pretty clearly is we would be better off regarding unemployment then we are now. I suspect, however, that many of the funds targeted for new jobs and infrastructure repair went to the states to avoid governmental layoffs and to stimulus funding of Democratic pet programs, but I am not sure. It is quite difficult to get good information about what happened to the infrastructure rebuilding program. But as Peter Morici reports, now only about $100 billion of the $759 billion stimulus package is slated for brick and mortar programs. Infastructure rebuilding is not only proceeding too slowing, it has been largely gutted by the Administration.

Assuming the moneys were as much diverted as not into tax cuts and aspects of the Democratic agenda, it seems that the federal government made a pretty big mistake here. If I had known more conclusively, I would have included this error of the Administration in my recent article on Washington's Problem is Poor Economic Solutions. But the water is a bit muddy. What is clear is the infrastructure rebuilding program too largely went nowhere and we have high and rising unemployment.

But the next question is, is it too late?

That is, is the economy too much on an upswing and mending to get such a WPA infrastructure rebuilding program and funding for it on its feet in time to be really useful? The answer largely depends, I think, on one´s assessment of where the economy is going with unemployment and what the worth of a repaired infrastructure and some clean up is.

The stock market now clearly thinks the economy is on the mend. Many here at Seeking Alpha have serious longer run reservations. Many economists and others believe the unemployment problem is going to last for a good while; some think a large part of it is permanent. Paul Krugman, himself quite an optimist, apparently has his doubts about employment improving quickly, too. So does Brad DeLong.

Such a program is certainly the most direct way to attack unemployment; however, as I pointed out in my article above, indirection and obliqueness have been the government´s big problems in trying to solve the nation's economic problems. The proposal here would fix that regarding unemployment.

But what should we do now?

I think we should initiate a WPA type of program now and take people off the unemployment rolls and put them for starters on the "shovel ready" projects in their areas that never really got started. Also, much general repair and clean up is needed in America that they could also start on. Taxpayers would get something local and tangible for their money, for a change.

The infrastructure clearly needs help, some $2.5 trillion in maintenance, repairs and rebuilding according to the Americans Society of Civil Engineers. The expense of those unmade repairs and lack of maintenance grows annually with further physical deterioration. Basic maintenance is lacking in too many areas. It will cost us much more later. We are digging ourselves into a hole here. The program suggested should help. We would not be having people dig holes and then refill them. There is honest work to be done.

If it turns out that the economy recovers more quickly, fine; continue with the program anyway. We need it. If the economy has a relapse, then we should be glad to have the program in place and we can expand it. Unemployment is forecast to continue for a good while anyway. The repairs are badly needed. We should get on with it.

These suggestions are better than simply giving the money away in unemployment benefits and planning a new stimulus program that has only temporary effects and costs too much. Much useful can be done in almost all areas, down to picking up the trash strewn about America. Too, it would not cost us $92,000 to $257,000 per job, as some have variously estimated the last stimulus program cost us -- the price of Washington's economic indirection and obliqueness, I contend.

I also believe that such a program, in addition to impacting the unemployment problem, could seriously improve our nation's spirit and outlook. Something tangible would be getting done. People who had no work, would be usefully employed. Bridges in shambles and roads badly pocked would be getting fixed and repaired. Things would get cleaned up and look better. People would notice. It would do us good and it would be useful.

We should have implemented such a program at the outset, but it is not too late. We should do it now.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Lines, forms and textures.
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Washington's Problem Is Poor Economic Solutions

The Fed observes the banking system has a deleveraging problem. So what does it do? It increases liquidity. Deleveraging and liquidity don't really cancel each other out. In fact liquidity creates the leveraging problems that later call for deleveraging. Another example. The Fed wants to lower mortgage rates. Instead of opening a window and making mortgage loans available at low rates to help the housing slump, what does it do? It decides to pursue a zero interest rate policy and quantitative easing, which lower most interest rates, including those for mortgages a bit, and it thereby creates a worldwide asset bubble and increases asset prices in the U.S., by lowering the rate of interest used to discount assets' returns and increase their value.

Now, we have asset price inflation in the U.S., but are verging on price deflation for goods and services, while a worldwide asset bubble is also building from the carry trade and people moving their money to distant areas providing higher returns. The Fed has obviously never heard of the medical maxim of "Do no harm."

The Fed and our national government want to increase GDP and get us back to where we were, so what do they do? The Fed does what it has done and our federal government engages in multiple stimuli programs which don't really fix our underlying problems and give us only temporary increases in GDP, at considerable expense. The approach ignores how we got to where we are and has the Fed and Washington putting their collective heads in the sand. Our short history, for these purposes, is easy enough.

China and the Pacific Rim arose economically, and we shipped many labor intensive jobs in the manufacturing sector overseas and made capital intensive the production of those products we could continue to manufacture here, the net result being additional unemployment from that portion of our manufacturing sector too, over and above the jobs shipped overseas. And we wonder why our unemployment is high. Manufacturing in the U.S. and employment in that sector have been substantially gutted, relative to where we would have been.

Our unaddressed problems beyond that include our in part resulting huge trade deficit. As Keynes said, countries which persistently run large trade deficits will persistently stay in a depressed state. The other major problem we ignore is the very badly skewed distribution of income which lowers the average propensity to buy consumer goods and services and reroutes that money, via the top households in the income distribution, into the secondary financial markets, driving prices up further. Do you ever wonder how it is we can have the DOW pushing over 10,000 at the same time the recovery is faltering and going nowhere fast and unemployment is also shooting up? I just provided the answer.

The approaches of the Fed and federal government are too oblique. They are not direct enough. If you want low mortgage rates, offer to make mortgage loans directly at low rates. Don't drag down interest rates generally and create a global asset price bubble. If you want to deleverage the banking system, do that, but don't drown the banks in liquidity. Instead run the bad boy and troubled banks through FDIC or similar proceedings that scrape off their bad debt, along with their stockholders, bondholders and management, and then sell them off to new buyers for fresh and balanced starts.

The new, proposed regulatory reform bill, which is really in large measure a proposed banking system reorganization act wants to do just that, but after pouring billions down the drain on TARP programs used to maintain top executive salaries and bonuses in the banking industry and to expand bank trading programs.

Aside from pulling us back from the brink during the credit crisis, the Fed´s and Washington's approach to our problems has been either misdirected, backasswards or to ignore them. This is not a good way for us to dig out of our recession and get on our feet. Instead, we now face additional problems created by the bad solutions adopted by policy makers.

This is not a good situation, but the regulatory reform bill does offer some hope, if it can just get past the political muscle of the money center banks. I worry that Congress does not realize how important the reform bill is. Congress likewise has been too much out to lunch on economic matters of late.

Posted and published on seekingalpha.com

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

For smaller boats. Complete with a breakwater.
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Roubini's Forecast

This is from an article by Keith Ronison that he posted and that was published by the editors of Seeking Alpha (seekingalpha.com):

" . . . The key speaker of this year's conference was Noriel Roubini. The NYU economist was recently voted the fourth best financial mind in the world by Bloomberg terminal users. He stated that he expects the recovery to be "U" shaped although the markets are pricing in a "V" shaped recovery. As a result asset prices have increased "too much, too far, too soon". He said that there is a 25% probability of a "W" or a double dip in the economy and he stated if a "W" were to occur the markets would break through previous lows set back in March.

"Speaking on commodities, Roubini said that the move from $30 oil to $80 oil has not been justified by supply and demand. He believes oil could go as high as $100 a barrel as a result of the dollar carry trade and that it would cause severe damage to global growth, but he said that hyperinflation is not a scenario that could play out due to the weakened state of the United States economy. The dollar carry trade, which Roubini said is starting to create bubbles in risky assets, could quickly pop sending investors fleeing for the exits. He told the audience that a short dollar trade reversal would be rapid and would cause a massive downturn in risky assets.

"Looking forward Roubini is worried about the second half of 2010 and advised the audience to be cautious. By then the stimulus funds will have finished moving through the economy and China will not be able to carry the world on its shoulders. He dismissed ideas that emerging markets could decouple from the United States. Structural issues exist in China that cause a high savings rates among citizens and these issues cannot be changed for at least a decade. He stated that their current growth is unsustainable and that the excess capacity that is currently being added will eventually be adding to global deflationary pressures. . . ."

Comment. I basically agree; however, I think the U.S. economy has some structural problems I have written about that compromise our longer term prospects relative to what they could be if those problems were addressed and repaired. There is some hope that will occur. The misnamed Regulatory Reform bill, which is actually a banking reorganizational bill, is a start.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

One of too many in the third world or a home never completed. A consequence of no construction loans.
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An Open Comment to Paul Krugman on the "Stupidity Economy"

Paul Krugman thinks we are too restrained by the desire not to run big deficits and and by other limitations on ever bigger stiumlus programs, all of which is creating what he calls the "Supidity Economy." I agree that we have a Stupidity Economy, but for different reasons. As I explained it:

Professor Krugman, I truly think you and other Keynesians view the real economy too much from the implicit vantage point of the rarefied flow models you have been schooled in. Recipe ��" Turn on model. Calculate output gap. Determine multiplier. Pour in cash. Shake, do not stir. And voila, the nasty gap is closed.

If our federal debt becomes too large from doing this too much -- because the multiplier keeps dropping and the stimulus affect keeps waning -- no sweat. We will just inflate our way out of it. That is a great way to deleverage the economy at the same time, anyway. Then everything will be better and back to normal, when the dust settles, even if the dollar will only be worth a farthing.

NOT! No way, I suggest. Sure, monetary policy is tapped out, interest rates are floored and our mighty insolvent money center banks are scared to death to make a loan because good borrowers are scarce and anyway they need the funds for their trading operations, salaries and bonuses.

Yes. The banks are a part of the problem, to be sure. We dropped mega-bucks into them and darn, they're still insolvent. They really need FDIC-like proceedings, also with a little supervision. Who knows, maybe the misnamed Regulatory Reform bill (aka bank reorganization act) might help us with this problem��"by scraping off banks' bad loans ��" and while we are at it, lets scrape off management, stockholders and bondholders, too. We can show the world there is a price for deliberately and knowingly getting it wrong. After all, we are not sending anybody to jail, so why not? It's the only thing sensible thing I've heard so far.

The original TARP idea of drowning insolvent banks with bad loans in liquidity always struck me as odd anyway. Too much liquidity creates bad loans; it doesn't get rid of them.

Then we have this nasty big trade deficit no one wants to talk about, that Keynes and others say is going to keep us in a depressed state relative to where we should be. But if there is anything policy makers and politicians want to talk about less than the trade deficit, it is the present maldistribution of income currently estimated to put only 20% of income into the hands of the bottom 60% of households and over 50% of income into the hands of the top 18% of households.

Now you can imagine what this does to the average propensity to buy consumer goods and services, and the impact of that on aggregate demand, but, hey, good lobbying and the prosperity of Congressional men and women and their wealthy well-lobbied for friends has to be preserved and taken care of. Taking care of their own is not to be messed with, or even discussed, no matter what its doing to aggregate demand and the distribution of income. Open your mouth on this one and they say, "out! go away."

Meanwhile, the top end of the income distribution keeps dumping much of its considerable unspent income into foreign and domestic financial markets, pushing those asset prices up. This whole situation gives us deflationary pressures on consumer good prices and inflationary pressures on financial asset prices --worldwide, I might add. Surprise! We are getting seriously mucked up here, but who notices?

Now if you wanted to use a little corrective fiscal policy - instead of just giving more tax breaks to the wealthy and abandoning the estate tax - and perhaps use a little negative income tax too, to repair the maldistribution problem and get those who matter back to buying stuff again -- well, good luck. Congress does not want to kill the goose that laid its golden egg, so you see, we are basically stuck, literally, and with the rats we have purportedly representing us.

Socialism is just fine for banks and big company bailouts, but not for redistributing income. It is no surprise that a smartie like Warren Buffet has taken big stakes in companies that got a lot of federal money, like poor old Goldman Sachs and little old GE, for examples.

I don't see a V or U or W shaped recovery. I see a V shaped recovery, but one that looks like this \___ where perhaps, the horizontal bar is raised a little a bit and is not a straight line, but a wavy one. The new real economy "lower normal," as some call it. But why not? Are we fixing (1) our banking problem? no, (2) our huge trade deficit problem? no, (3) our income distribution problem? no, or (4) the huge unemployment problem arising out of our manufacturing sector over the last 15 years or so? no. We are not doing anything except throwing money around carelessly.

We cannot even get the infrastructure rebuild and repair program (aka the Reinvestment and Recovery Act) on its feet and running. Worse, too much of the program turns out to be Congressional pork anyway. Outrageous! We were sold a bill of goods and the program is way behind. Meanwhile, the infrastructure sags even more and the price of fixing it is rising fast. Not too smart.

INEFFECTIVE is what we are and who pays for it? - the poor unfortunates that don't have anything to eat at the end of the month and live in the lower 60% of the income distribution with only 20% of the country's income. That's who. The wealthly and Congress don't want to hear about it. Why? Because they are doing just fine, in their gated communities.

Like I said, I do agree with Paul Krugman that we have a Stupidity Economy, it is just I think so for different reasons

Posted and published on seekingalpha.com -- very popular!

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

On a pleasant afternoon.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Maintenance 'R' Us -- not exactly.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

A simple, pleasant setting.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Shoes are a bother and an expense.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Polynesians love being near the water and kids, in it.

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