What is wrong with the US economy?

[turbo]

Those of us who are older and/or disabled have a very disturbing view of our economy. The Fed has reduced the interest rates over and over again, so that my money-market account has dropped from producing about $750/month to about $500/month. In the same time, stocks have tanked so that in the first quarter of this year, my IRA has decreased in value by over $10K. Bush and his neo-con cronies are intent on stealing the wealth of average conservatives and distributing it to speculators who are apparently free of any kind of reasonable regulation.

 

[WheelsRCool]

But who bats an eye when a corporate executive makes $100/hr or $500/hr or $1000/hr? Do corporate managers really work 5 times or 50 times harder during 8 hrs than they guy on the shop floor? I think not. And it's usually not even the executives/managers money, but the money of stockholders and bondholders.

The problem with the economy is not labor as much as it is lousy and excessively (even obscenely) overpaid management. IMO.

Remember though that you are not paid according to how hard you work, you are paid according to what you produce. If you only work one hour a day and somehow can make $30 million a year working one hour a day, then you are doing something in that one hour that produces something that the economy values enough to pay you $30 million a year.

What you produce is what counts, not how hard you work, for the most part.

If cafeteria workers want higher wages, they need to get a higher education. A cafeteria worker is an easily replaceable job I am going to guess, so it isn't going to command a high wage.

Personally, I blame the economy (which overall has done quite well I think) on greed amongst the American people, too many people spending themselves into credit card debt, using their home equity to finance purchases of SUVs and other expensive items that they should only buy if they can actually afford them, too many people took out mortgages they could not handle, and too many banks allowed them to, etc...thus crashing the housing markets and causing the credit crunch, and so on.

 

[Evo]

So a corporate manager gets fired, and walks with $91 million, but the folks at the bottom can't get better pay. I bet they don't have corporate expense accounts either. And I bet if they get fired, they don't get a generous severance package.

Well, yeah, that would be because of his contract. He can be a complete loser, but he somehow got to that level were he has a deal and the company has to honor that deal.

My company's former CEO was a complete loser and was ousted by the stockholders for nearly bankrupting the company. He got his multi-million dollar salary for a year, plus $52 million in severance and untold other perks. Because of his mistakes, thousands of people have lost their jobs to compensate for his errors.

I don't, however, see what this has to do with hourly workers or even salaried management. Obviously, if you are low on the totem pole, you have what you have. This has been the case since the beginning of time. Cerfs and land baron's. Royalty and commoners. Merchants and workers. Is there something surprising here?

 

[Poop-Loops]

I don't, however, see what this has to do with hourly workers or even salaried management. Obviously, if you are low on the totem pole, you have what you have. This has been the case since the beginning of time. Cerfs and land baron's. Royalty and commoners. Merchants and workers. Is there something surprising here?

The fact that you think it's alright is surprising to me. Astronuc is pretty pissed that the backbone of any corporation gets pissed on while the people who profit the most end up profiting even more, simply by getting fired!

 

[Evo]

The fact that you think it's alright is surprising to me. Astronuc is pretty pissed that the backbone of any corporation gets pissed on while the people who profit the most end up profiting even more, simply by getting fired!

I'm not naive and I happen to understand business. I have a degree in Business Management and have been put through ongoing education in business management. But one does not need to have a degree in business to understand that there are people that run the business and those that don't.

Like it or not, people that head big business get very lucrative contracts. The reality is that it is very hard to sever these contracts, regardless of how incompetant the person is and the costs to try to take away what that person has can be very costly and very detrimental, easier and cheaper to just get the loser out and try to turn the business around.

It is how things work, unless you want to try Communism, but ooops, that doesn't work does it? People in power have more than those not in power and that has always been the case.

Would it be better for these companies to not exist and thus no jobs?

Also, I never said I think it's all right, I said that is how it is. I think if the person is responsible for running the company into the ground they should not only get nothing when booted, they should be made to repay what they cost the company. But that's not how it works in the real world, that's just wishful thinking.

If we are going to discuss business, then we need to understand how business realistically operates.

 

[Astronuc]

Well, yeah, that would be because of his contract. He can be a complete loser, but he somehow got to that level were he has a deal and the company has to honor that deal.

My company's former CEO was a complete loser and was ousted by the stockholders for nearly bankrupting the company. He got his multi-million dollar salary for a year, plus $52 million in severance and untold other perks. Because of his mistakes, thousands of people have lost their jobs to compensate for his errors.

I don't, however, see what this has to do with hourly workers or even salaried management. Obviously, if you are low on the totem pole, you have what you have. This has been the case since the beginning of time. Cerfs and land baron's. Royalty and commoners. Merchants and workers. Is there something surprising here?

Not surprising - just unacceptable to me, and it's immoral and it's wrong. Just like mugging is wrong, but then mugging is illegal as well, but being greedy and incompetent isn't.

Like it or not, people that head big business get very lucrative contracts. The reality is that it is very hard to sever these contracts, regardless of how incompetant the person is and the costs to try to take away what that person has can be very costly and very detrimental, easier and cheaper to just get the loser out and try to turn the business around.

I fault the idiots who make those contracts. Whatever happened to oversight and fiduciary responsibility.

Most corporate managers are replaceable, or so it seems from the fact that companies find replacements.

 

[Jimmy Snyder]

Just like mugging is wrong, but then mugging is illegal as well, but being greedy and incompetent isn't.

You would make greed and incompetence illegal?

 

[WheelsRCool]

Not surprising - just unacceptable to me, and it's immoral and it's wrong. Just like mugging is wrong, but then mugging is illegal as well, but being greedy and incompetent isn't.

I fault the idiots who make those contracts. Whatever happened to oversight and fiduciary responsibility.

Corporate managers who command those kind of contracts have to be skilled at first to be able to demand that type of pay, it isn't just given to them. They get the contract, and if they bomb at running the corporation, then they lose the ability to command such high pay in the future. I'd imagine it's like actors/actresses in Hollywood. If you command $20 million per movie, you have to have worked your way up to that amount, but if your movies start bombing, your pay per movie goes down.

Not surprising - just unacceptable to me, and it's immoral and it's wrong.

I disagree. If that's what the contract was, that's what the contract was; but word will go out that they are a bad manager and the pay they can command in the future will decrease until they get better results.

 

[Astronuc]

I disagree. If that's what the contract was, that's what the contract was; but word will go out that they are a bad manager and the pay they can command in the future will decrease until they get better results.

After the damage is done.

 

[Jimmy Snyder]

A company never needs a good manager as when times are tough. The difference between losing $100 million and losing $200 million is worth, well, $100 million. If the manager is paid $50 million because they can make that kind of difference, then they are cheap, not expensive. You can't ignore the jobs that are saved by such a manager.

 

[edward]

A company never needs a good manager as when times are tough. The difference between losing $100 million and losing $200 million is worth, well, $100 million. If the manager is paid $50 million because they can make that kind of difference, then they are cheap, not expensive. You can't ignore the jobs that are saved by such a manager.

And yet I seem to read a lot about new managers who improve the bottom line by cutting jobs. They make a company appear more profitable then bail out before the crash.

 

[Jimmy Snyder]

And yet I seem to read a lot about new managers who improve the bottom line by cutting jobs. They make a company appear more profitable then bail out before the crash.

Scott Paper is a famous example. The company was headed for bankruptcy when Dunlap took over, fired a lot of people, and saved the company. He cut jobs. He saved jobs. Would you prefer that all the jobs were lost?

 

[WheelsRCool]

The really good companies who have to cut jobs to save the company will oftentimes try to help the workers they are cutting find new jobs and give them a good advance notice. The one company won an award for this, I forget which one though.

 

[edward]

The really good companies who have to cut jobs to save the company will oftentimes try to help the workers they are cutting find new jobs and give them a good advance notice. The one company won an award for this, I forget which one though.

It wasn't Enron

 

[edward]

Scott Paper is a famous example. The company was headed for bankruptcy when Dunlap took over, fired a lot of people, and saved the company. He cut jobs. He saved jobs. Would you prefer that all the jobs were lost?

Things didn't work out so well for chainsaw Al at Sunbeam.

 

[WheelsRCool]

It wasn't Enron

For every Enron, there are thousands of companies that obey the law and treat their workers well overall.

And Enron, Worldcom, Tyco, etc...are examples of free-market capitalism working; if a company lies and grows too corrupt, in a free-market, eventually the market boots it out. There are always going to be some bad apples here and there. But overall the free-market creates incentives for companies to treat their workers well.

 

[Poop-Loops]

For every Enron, there are thousands of companies that obey the law and treat their workers well overall.

And Enron, Worldcom, Tyco, etc...are examples of free-market capitalism working; if a company lies and grows too corrupt, in a free-market, eventually the market boots it out. There are always going to be some bad apples here and there. But overall the free-market creates incentives for companies to treat their workers well.

You're completely ignoring all the people who got raped by Enron's fall. Honest Joes who were lied to and then had their life savings stolen.

You're also ignoring the people on top who got off scott free with a lot of cash. That would be the incentive to lie and cheat -- to get rich.

Governments controlling business is bad, but some regulation to protect the people isn't.

 

[Astronuc]

For every Enron, there are thousands of companies that obey the law and treat their workers well overall.

And Enron, Worldcom, Tyco, etc...are examples of free-market capitalism working; if a company lies and grows too corrupt, in a free-market, eventually the market boots it out. There are always going to be some bad apples here and there. But overall the free-market creates incentives for companies to treat their workers well.

Enron, Worldcom, Tyco are certainly not examples of free-market capitalism. Free-market capitalism is a myth. Enron engaged in market manipulation, and all three top level managers mislead investors and lenders. So aggregious were the violations, these companies collapsed - and a lot of people got hurt financially. And the markets are far from free.

 

[WheelsRCool]

You're completely ignoring all the people who got raped by Enron's fall. Honest Joes who were lied to and then had their life savings stolen.

You're also ignoring the people on top who got off scott free with a lot of cash. That would be the incentive to lie and cheat -- to get rich.

Governments controlling business is bad, but some regulation to protect the people isn't.

I agree that where it will work regulations to protect people is good, but usually all that happens is such regulations allow just such corruption to become rampant, so one has to be very careful with how they are applied; overall though, the free-market creates incentives for them to remain honest. The top guys of Enron are in a lot of trouble.

Remember, no system is perfect, there will always be some bad apples. Like I said, there are thousands of other companies that did not do what these firms did.

What those companies did is not at all justified and the people who defrauded lenders, investors, employees, etc...need to punished by the law. But free-market capitalism is overall the best system for preventing such rampant corruption and for exposing it when it occurs.

Some regulations are needed, for example the Securities and Exchange Commission for the stock market and trading. Also regulations for things like pollution from industry work well.

Economies burdened with extensive regulations, such as those in Europe, do not perform well at all.

Enron, Worldcom, Tyco are certainly not examples of free-market capitalism.

They're fall is an example of free-market capitalism working in that it kicks out people who break the rules. In protected industries, where companies obtain illegal monopolies, oligopolies, and/or cartels, such rampant corruption can occur and the companies will not collapse.

Free-market capitalism is a myth. Enron engaged in market manipulation, and all three top level managers mislead investors and lenders. So aggregious were the violations, these companies collapsed - and a lot of people got hurt financially. And the markets are far from free.

I would disagree that free-market capitalism is a myth. A completely laissez-faire market is a myth. Nothing in economics is absolute, but overall, the market is a free-market. The United States government, in comparison to the governments of most other nations with respect to their own economies, still plays overall a very small role in the U.S. economy.

However, the U.S. economy could be freer with certain regulations reduced, the corporate tax rate reduced, and the tax code overall simplified.

Also, in advocating for a free-market, I am no advocating for anarchy, i.e. no government. Government is very much required for a free-market to function. We just want the government to play the smallest role it can in the economy.

Also, in advocating for lack of regulations, I am not advocating for lack of oversight. Oversight is very important, but usually the free-market can create the necessary oversight agencies itself.

 

[Astronuc]

Looking at what constitutes a free-market:

http://www.econlib.org/library/Enc/FreeMarket.html

By definition, in a free market environment buyers and sellers do not coerce or mislead each other nor are they coerced by a third party.

from http://en.wikipedia.org/wiki/Free_market

Deception, as was the case Enron, Tyco, Worldcomm, . . . . , precludes a free market.

 

[mheslep]

Looking at what constitutes a free-market:

http://www.econlib.org/library/Enc/FreeMarket.html

By definition, in a free market environment buyers and sellers do not coerce or mislead each other nor are they coerced by a third part

y.
from http://en.wikipedia.org/wiki/Free_market

Deception, as was the case Enron, Tyco, Worldcomm, . . . . , precludes a free market.

Arg, classic case of bad Wikipedia JuJu there as the definition is wrong. Looks to be intentionally so as the Wiki quote points to a source and then ad libs viz 'misleading'. Stick with the econ lib definition:

Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents.

No mention of misinformation required. Voluntary agreement, without coercion is all that's needed. Information is practically never perfect in a free transaction between two parties whether it is through plain misunderstanding, ignorance or an outright falsification. Economists say the quality of information effects the efficiency of a market and yes if it gets bad enough one can have a a market failure. This most common cause of that is lack of good pricing information as the case of imposed price controls. Market inefficiency or even failure does not make the practice of free market capitalism a myth any more than I could say 'nuclear fission is a myth' because I observe only a low reaction rate in the presence of a moderator.

 

[Astronuc]

No mention of misinformation required. Voluntary agreement, without coercion is all that's needed. Information is practically never perfect in a free transaction between two parties whether it is through plain misunderstanding, ignorance or an outright falsification. Economists say the quality of information effects the efficiency of a market and yes if it gets bad enough one can have a a market failure. This most common cause of that is lack of good pricing information as the case of imposed price controls. Market inefficiency or even failure does not make the practice of free market capitalism a myth any more than I could say 'nuclear fission is a myth' because I observe only a low reaction rate in the presence of a moderator.

If one looks at contract law, if one party willfully deceives the other, then the contract is void. Same applies to free-market - if one of the parties in a transaction is deceptive, then it is not free. If one party engages in manipulation, then it is not free.

 

[Jimmy Snyder]

If one looks at contract law, if one party willfully deceives the other, then the contract is void. Same applies to free-market - if one of the parties in a transaction is deceptive, then it is not free. If one party engages in manipulation, then it is not free.

If one party willfully deceives the other then the contract is void, not all contracts are void. If you declare that a single lie, by a single buyer or seller, in a transaction no matter how small, prevents a market, no matter how large from being free, then the term free-market has no meaning whatever.

 

[russ_watters]

Along these lines, the lies told by ENRON do not absolve the shareholders of the responsibility they have for picking their own stocks. Rule #2 of investing in stocks is diversify and they chose to break it. Those who lost virtually their entire life savings made their own bed.

 

[mheslep]

If one looks at contract law, if one party willfully deceives the other, then the contract is void. Same applies to free-market - if one of the parties in a transaction is deceptive, then it is not free. If one party engages in manipulation, then it is not free.

One is a legal matter, the other is economics; the former does not define the latter. Everyday people enter into transactions with contracts, the fact that one party defrauds the other doesn't mean the original transaction was involuntary; rather that was the open eyed purpose of having the contract. Otherwise a handshake would have sufficed. The only requirement is voluntary agreement to conduct the transaction as Rothbard states and you'll find the like in any reputable Econ. textbook. You have no free market only when there is coercion: A takes value from B by force, and A can be an individual, perhaps a monopoly where B has no choice, or the government.

In any case the economic theory of free market capitalism goes back 300 years now. Its no myth and complications like rip off artists, fraud, etc don't make it one.

 

[lisab]

Along these lines, the lies told by ENRON do not absolve the shareholders of the responsibility they have for picking their own stocks. Rule #2 of investing in stocks is diversify and they chose to break it. Those who lost virtually their entire life savings made their own bed.

I thought that Enron employees' 401(k) matching funds were granted only in Enron stock, and employees were not allowed to move that money out until they reached age 50.

After 20 years of getting matching funds, an employee in their late 40s would not have (well, should not have) virtually all their eggs in the Enron basket, but it would be a big chunk.

 

[russ_watters]

I thought that Enron employees' 401(k) matching funds were granted only in Enron stock, and employees were not allowed to move that money out until they reached age 50.

I actually never heard that. I was under the impression that it was voluntary. [edit] Found a link confirming that. So yes, an employee could have lost roughly half of their 401K assuming they chose not to invest the other half in ENRON.

 

[Astronuc]

Economic aftershocks threaten recent optimism
GE's warning pokes hole in recent sentiment that credit crunch has passed

GE, whose activities reach a broad spectrum of business and consumer activity from TV shows and commercial loans to industrial turbines, said that profit fell 6%. It placed a big part of the blame on the near-collapse of investment bank Bear Stearns Cos.

The profit disappointment came as a shock to many analysts and strategists who had been expecting that diversified, international companies as well as the broader U.S. economy were somewhat buffered from the big loan write-downs and trading losses that have rocked brokerages and banks this year. U.S. stock markets sold off sharply, cutting into healthy gains made since mid-March.

. . . .

The rebound had been fueled by renewed sentiment on Wall Street that the worst of the credit crisis -- including the threat of spiraling financial bankruptcies -- was past. . . .

GE might be a good buy now.

The worst might be yet to come.

GE's Press Release
http://www.genewscenter.com/Content/Detail.asp?ReleaseID=3369&NewsAreaID=2&MenuSearchCategoryID=

Bloomberg article on GE
http://www.bloomberg.com/apps/news?pid=20601087&sid=akzHhrEzO6hU&refer=home

GE apparently predicted last month that it would achieve this year's target.

 

[rewebster]

What is wrong with the US economy?

greed


--and the people who feed on the greedy (those that don't care what happens to others as long as 'they' get what they want)

 

[Astronuc]

Wall Street Winners Get Billion-Dollar Paydays
http://www.nytimes.com/2008/04/16/business/16wall.html

Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.

One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.

Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.

So the economy is doing great! Everything is fine!

Oh, but wait -

Retailing Chains Caught in a Wave of Bankruptcies
http://www.nytimes.com/2008/04/15/business/15retail.html

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable. . . . .

Merrill Reports Big Loss, Plans 4,000 Layoffs
http://dealbook.blogs.nytimes.com/2008/04/17/merrill-posts-196-billion-loss-in-1st-quarter/

Merrill Lynch said Thursday that it lost $1.96 billion for the first quarter this year, as the meltdown in the housing and credit markets continued to batter the firm.

Much of that stemmed from more than $9.4 billion in write-downs and “credit valuation adjustments” tied to the firm’s holdings in mortgage securities and loans meant to finance leveraged buyouts. The firm also said it intends to cut 4,000 jobs, or 10 percent of its workforce.

The loss, which amounts to $2.19 a share on revenues of $2.93 billion, is a sharp reversal from the $2.16 billion in profit and $9.6 billion in revenue it earned in the same time last year. Analysts surveyed by Bloomberg News had expected on average a loss of $1.79 a share.

"“This has probably been as difficult quarter as I’ve seen in my 30 years on Wall Street,” he [John A. Thain, the firm’s chairman and chief executive] said on a conference call with investors on Thursday."


And the venerable Harley Davidson company is reducing inventory and cutting production. http://biz.yahoo.com/rb/080417/harleydavidson.html

CHICAGO (Reuters) - Harley-Davidson Inc (NYSEOG - News) said on Thursday it would report full-year earnings well below its forecast, slash production and lay off hundreds of workers as the U.S. economic slowdown crimps demand for its iconic motorcycles.

How long with the recession last, and how deep will it go?

 

[Jimmy Snyder]

How long with the recession last, and how deep will it go?

According to what I gather from this thread, the recession started 232 years ago and will last forever. For the more objective observers, the way recession is defined, you have to be in it for 6 months before you get the news. As far as I know, we have not yet gotten the news, but I haven't been paying that close attention.

I don't know what metrics are used to measure the depth of a recession, but I expect most of them to match the last recession that was based on falling real estate values. This real estate slump may be slightly worse than previous ones because it is accompanied by the foreclosure of shaky loans, a feature not as prevalent last time. It looks to me as if the Fed is prescribing a shot of inflation for this disease.

 

[turbo]

According to what I gather from this thread, the recession started 232 years ago and will last forever. For the more objective observers, the way recession is defined, you have to be in it for 6 months before you get the news. As far as I know, we have not yet gotten the news, but I haven't been paying that close attention.

I HAVE been paying attention, and the economy has been been bad for some time, and will probably not turn around anytime soon.

It started back when Greenspan and the Fed prescribed interest rate cuts over and over again to make sure that businesses had access to cheap money. Instead of letting the economy ride out rough spots through normal market pressures, they kept doling out hand-outs to Wall Street. The problem with that is very obvious to people like myself who have saved for retirement. I have watched the interest rates on my money market account drop because these rates are tied to the Fed rates. At the same time, the Fed has effectively devalued the dollar, so even if the interest rates had not dropped, the total value of my account is still being eroded. Also, the value of my IRA (heavily invested in stock-based funds) has dropped by almost 9% in the first quarter of this year, and that's not going to turn around any time soon - I'll just have to ride that out. Those of us looking at retirement in the short-term have a less-than-rosy view of the economy when we see the results of years of hard work being stolen to fund businesses. We have a society that decries health-care reform as "socialism" and "welfare", but ignores the real cost to all of us to provide welfare to big businesses.

 

[Astronuc]

The economy seems 'good' because so much is based on 'credit' supported by 'value, equity'. Now that value has decreased, and may continue to decrease, meanwhile - a lot of credit has all of a sudden gone bad.

There is a lot of 'virtual wealth' that in theory would become real in the future, but there will be less wealth than there would have been if the investments had been sound.

The US government is obliged to repay debt. If not, we'll see a real crisis.

The problem will become more severe if it is realized that US federal debt is accruing faster than can be repaid. Taxes may necessarily have to increase - or the economy may just collapse. Just imagine what will happen if there is another Katrina or two in the next few years. And the possibility of drout and reduced agricultural production, in conjunction with increasing energy prices.

 

[Jimmy Snyder]

I HAVE been paying attention, and the economy has been been bad for some time, and will probably not turn around anytime soon.

Yes, as I said, for 232 years. But the question was not "has the economy been bad", but rather "are we in a recession".

Has there been an announcement that are we in a recession? I think you need two consecutive quarters of decline in GDP for that. From the point of view of this thread, the bad news is that in the 4th quarter of last year GDP grew, drat the luck. That means that all the anecdotes you have heard about pain in this sector and the other are just that, anecdotes. We need a big picture guy here. Who will stand up and give us the whole story?

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm"

 

[Astronuc]

Recession is technically defined as 3 consecutive quarters of decline in the GDP. But what if somethings are kept off the books, i.e. the Bush administration fudges the numbers?