Monday, December 13, 2010

Barking up the wrong tree

Whichever way the tax debate goes, it is clear that the one objective that is on all sides' agenda, and which is likely to be met, is that of putting some extra cash in middle-class Americans' pockets. The underlying assumption and expectation is that they will go out and spend that cash, thereby stimulating the economy.

However, unless these patriot-consumers buy from a very slim range of goods that are made in America, it is likely that their purchases will end up creating new jobs somewhere else in the world - in spite of high retail markups (see Note 1). Further, the deficit in the state's budget as a result of the tax cut will be filled by borrowing from foreign lenders.

Somehow, these actions are supposed to be good for the American economy.

I spoke to a partner of an architectural firm recently about his outlook for business next year. He didn't see any construction activity picking up locally, but mentioned that their design projects in China are keeping them afloat. "The Chinese are still building", said he. Why not, when they have American policy-makers on their side?

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Note 1: Recovery hawks are quick to point out uptrends in retail sector jobs. Celebrating retail jobs for the lack of any other strong indicators is like saying "We have no money for groceries. But thats OK, because the kids have now gotten used to the taste of cardboard.".

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