Thursday, August 4, 2011

Our economy is in imminent danger – What should we do?

This graph is a consolidated chart for US Federal Deficit as Percent of GDP 1980-2010, Private Nonfarm Payroll Employment as Percent from Previous Peak 1980-2010, and the Job Creation and Destruction Rate 1977-2009. (Please click on image to enlarge the chart.)
During the recession in 2006-2009, some notable developments were as follows:
(1)   The job creation rate abruptly decreased from 16.5 in 2006 to 12.4 in 2009. The 2009 rate of 12.4 was the lowest since data collection started over 30 years ago.
(2)   Together with this, the job creation rate for business births also rapidly decreased from 6.3 in 2006 to 4.2 in 2009, and in 2009 the job destruction rate for firm deaths (4.5) rose higher than the job creation rate for births (4.2) for the first time since 1983.
(3)   Moreover, with sizable government spending, the job destruction rate dropped temporarily from 15.6 in 2007 to 14 in 2008, but sharply increased again to 16.4 in 2009.  This was an unexpected, even extraordinary, event.
Why did these things happen in the U. S. economy at that time?
Compared to the previous recessions in 1981-1982, 1990-1991, and 2001, it could be cautiously concluded that the job creation and retention capability of the market itself was already seriously damaged and weakened by 2006, and expansionary economic policies didn’t work any longer.  Simply put, the self-generation and recovery capability of an economy determines if a stimulus will be effective.  If such capability is impaired, stimulus will be ineffective.
Then, have we had an appropriate self-generation and recovery capability in the market over the last 10 years?  No, definitely not.  Look at what has happened in the market or economy over that period.
Both the Bush and the Obama administrations took nearly every step possible to revitalize the economy with the various expansionary monetary policy supports of the Federal Reserve Bank, but to no avail.  Instead of solving the problems, it seems that most of their efforts have created more of them.  The self-generation and recovery capability of the market had seriously weakened, and the government policies adopted were inappropriate.  But, unfortunately, nobody has considered at all the condition of the self-generation and recovery capability of the market until now.
What is the self-generation and recovery capability of the market?
A good doctor does not simply prescribe medicine for a disease.  He first must understand that the medication is only a stimulus to support the self-generation and recovery process.  If he finds the body has a weak self-generation and recovery capability, he tries to restore that capability first and then adjust the medication according to the condition of the patient, because he also knows that a medicine could also be a poison to the body. 
Likewise, I believe our market or economy has its own self-generation and recovery capability. If it is seriously damaged, the treatment that consists only of economic stimulus could actually be harmful to the economy, contrary to its intended purpose.  That being said, it seems that we have adopted a series of stimulative economic policies without properly weighing the condition of the self-generation and recovery capability of the market or economy.  In my view, the self-generation and recovery capability of our economy has steadily worsened over the last ten to twenty years of the Modern Information Age. 
Why has the self-generation and recovery capability of the market worsened?
As I explained in detail in “Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity”, I believe the existing supply chain process has been too efficiency oriented, to the point where it has not created enough businesses and jobs to keep consumer spending at the desired level.  This is strongly correlated with the worsening of the self-generation capability of the market and correlates to the well understood rise in the percentage of financial assets in GDP.
Thus, we have had little choice but to continually adopt excessive expansionary economic policies and have enacted stimulus plans to stave off recession over the last decade.  This has only postponed the inevitable deep economic decline into which we are now poised to descend. 
If we do not change the existing efficiency-oriented supply chain process soon to a more effectiveness-oriented synergistic process, I strongly believe that this economic tailspin cannot be stopped.  At the very least, as long as the current conditions remain, we cannot achieve sustainable economic growth, and this results from the old supply chain’s tendency to eliminate jobs and buy out or bankrupt competitors.  The supply chain does about $4 trillion retail trade a year in the United States alone.
What will happen in the economy under the current condition?
Even if it is very difficult to prove with econometric data, for no such data exist, it is clear that the self-generation and recovery capability of our economy has been seriously weakened.
In this situation, it is doubtful that the overall job creation rate, which includes the job creation rate for business births, can be significantly increased only with the existing economic policies.  As we already know that private nonfarm payroll employment rate fell in 2010, it seems likely the overall job creation rate and the job creation rate for births also decreased in 2010.  Then, what do you think the situation of Private Nonfarm Payroll Employment will be after 2010?  As long as the weakened self-generation and recovery capability of the market is not repaired, it will not be easy to change its declining trend like Shape [3] into an improving trend like Shape [2] or Shape [1], no matter how powerful the stimulus.
What do you think would happen to the US Federal Deficit, the job destruction rate, and the job destruction rate for business deaths?  In the situation where the effect of government spending has already resulted in increased job destruction in 2009, can you believe that it could truly reverse course in 2010?  Moreover, no matter how effective stimulus spending is in preventing further worsening of the job destruction rate and the job destruction rate for business deaths, the trend of the US Federal deficit upwards like Shape [A] seems inevitable.
Moreover, economic bubbles in equity and debt markets still persist worldwide.  Fiscal risks stemming from high deficits have been significantly aggravated in many countries, especially in such European countries as Greece, Ireland, and Portugal.  We cannot imagine when they will burst again or where the trigger will be squeezed.  In other words, the possibility for these to unfold as an economic tsunami is growing.  In this event, employment will inevitably plummet, as indicated in Shape [3], and the Federal deficit will also skyrocket, as in the steeper Shape [A].
Considering the current rapidly deteriorating situations in both the domestic and international economies, it seems we are already on course for the worst-case scenario, that is, another Great Depression.
Can we avoid this economic catastrophe?  Not an easy thing, but yet not impossible, even if it is so late.
What should we do?
Directly speaking, we should develop an information-based infrastructure for a more effectiveness-oriented synergy supply chain and implement it quickly and effectively in the market, to restore the self-generation and recovery capability of the economy as soon as possible.  (Please see the details in my article: “Breaking Down the Economic Death Spiral – and Saving the World Economy”)
Then, the job creation rate could significantly increase again, and the job destruction rate would sharply decrease.  As a result, the US Federal Deficit could rapidly be reduced to Shape [B] or Shape [C], and the employment figures could also be improved as depicted in Shape [2] or Shape [1].  I believe this is the most viable and effective solution for the imminent economic crisis.  As with many such plans, the tools to do so already exist.  Do we have the will to do it?
Some might think that it will be almost impossible to change the supply chain process in the real market or that it will take too long, even though conceding that it would be desirable.  But I believe the right circumstances for the development of this new effectiveness-oriented supply chain process are already in place.  That is, information technologies, facilities, devices, and people are already in place to develop a new information based supply chain infrastructure.  Moreover, I believe in the power of information technology, that is, its instant effectiveness all over the world, and in people’s hope.  Thus, the only issue that remains is the will to develop it. I believe that the solution is already in sight.  Actually, we, UBIMS, Inc., have already developed that solution.  It only needs to be implemented.  Once decision-makers are willing to make the necessary choices, it will be relatively easy to implement, and it will not take long to see positive results.
Therefore, I strongly recommend the governments and leaders of the Western countries, especially the United States, initiate the development of this new synergistic information-based supply chain infrastructure, and provide the active assistance and support necessary to revitalize their own economies and also the world economy, and that we do so immediately.
Finally, I would like to add a word of caution to our leaders:  Time is running out.  The old supply chain system continues to shed jobs and wreck businesses.  The UBIMS plan can reverse these effects in time to avert catastrophe.

Written by Luke Ho-Hyung Lee and Jess Parmer.

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