Pulling all the plugs to turn around the economy

Time flies, it has been two year after I had written the article “The world economy in future tense”. With the passage of time, the vicissitude of world economy pulled out of the recession but the incipient recovery mires in slow growth on the back of withering demand. Countries with gargantuan budget deficit and weak economies are in a quandary and lack consonant in whether to continue to stimulate economy or putting budget deficit in order. To handle these intractable problems is a tough decision choice. As the chorus of European countries has chosen the latter, which portends the possibility of the European economy be stifled in a stagnant growth or fall right back to another recession in the foreseeable future is looming large. Will the miracle of Germany export boom continue or slowly wane? We are all interested to see how it will pan out, hopefully, not so ugly.

I am loath and find it off-putting to write this article after learning from past experience. To my chagrin, I wrote them in personal capacity. I toiled arduously days and nights, gleamed from reams of source materials. Those benefited from the free stuff were not gracious enough even for a word of appreciation, the cheapest. Put vicariously, no one has incentive to go ahead the odyssey when the product is not valued. I struggled deep in my heart and my conscience told me that I could not betray those people have faith in me and also the consequences of the economic decision involved could have far reaching impact affecting everyone life.

As things are, one piece of caveat, I am disconcerted that the risk of double dip remains, in view of faltering domestic demand, wonky financial systems, austerity measures to cut budget deficit in major economies. Some orthodox economists hold the view that if the world will to slip into another recession, so be it; refrain from intervention; let the economy heals itself, that is their theory. I am not an erudite economist or was trained to be one; however, I penchant pragmatic and holistic analysis and observe consequentiality. I call myself a realist. Of course, I browsed through many economic articles to understand the writers’ train of thought. I am not against natural cycle, but I see the orthodox view surreal. It is propitious for government to play a flexible and constructive role helping to find egress in a morass, facilitating recovery when the economy is weak and staying sideline when the economy recuperated. Applying same analogy though in different organism, if you are afflicted with cancerous tumor, which would you choose, consult a doctor or apply natural heal?

If you believe in my line of thought, I continue to explicate the merits and demerits of various prescriptions to cure economic woes. In my previous article “The world economy in future tense” I adopted an open mind approach to tackle the crisis. I proposed many options for government spending emphasizing strategic in nature; with hindsight, they were quite prescient and clairvoyant. Is it a gospel truth or just panjandrum? I envisioned investing in green tech, such as renewable energy to counter climate change, and today frequent extreme weather, floods, draughts etc continue, showing no sign of attenuating, were those mishaps climate change related? Should we muster our efforts to counter the threats? I mooted increase agricultural productivity to take up the gauntlet of high food price, in the current year, floods everywhere precipitate food price hike. Ballooning healthcare costs show no sign of abating. R & D expenditure helps the economy out of stagnant growth. Are they strategic if they are overarching and have significant impact of our life?

Those options were without the remedy of unemployment in my mind. What I concerned then was moral hazard issue, if the spending was forward looking; it was less likely inflicting moral hazards. However, in America, high unemployment became an immediate sore; politicians measured how those options would cure the unemployment woe. I was stumped by this warp because those options and employment issue were not highly correlated; for example, green tech is still a nascent industry and in small size. I am perplexed how it can resolve the unemployment problem? Many of the skills of the unemployed are not immediately transferable. There are no quick panaceas to unemployment issue and it needs forbearance getting through the maze of the problem assiduously. This is misconception one.

Another misconception is: The magic of government spending in infrastructure will wipe off all the household debts. The reality is debt ridden households can’t elude the problem to repair their own balance sheet. Spending on infrastructure does not have the capability to turn everything around, if you bank on it as a remedy. In the following, I make apposite comment on each option according to its merits and demerits. For infrastructure spending, I am not Maynard Keynes’s disciple; the merits are:
First and foremost, it is quick to maintain the momentum to prevent sharp economic activities declining which was evidenced by the recent crisis.
Second, it is broad base. My observation tells me that the impact of public spending on other industries cannot be as large and broad base as infrastructure spending.
Third, when monetary policy is at its limit. That is exactly what is happening now; Even the Fed keeps reducing interest rate to its lowest, bank lending does not improve quickly. The impact of monetary policy becomes limited.

The demerits are: First, it only provides momentum to jumpstart economy, it is not an ultimate cure, and you still need to painstakingly work out the details to mend the economy. Second, without planning and administration, it becomes a political tussle and easily building bridge to nowhere. Third, country leader needs to dovetail public spending and economy mending, so that the momentum becomes sustainable. The rub is: The longer it takes to mend the economy; you may need few bouts of spending thick and fast for economy to gain traction, which will use up surpluses. So, it is precisely the reason why prudent budget to build up reserve during normal time is imperative. Many major debt ridden economies are now in different extent of having fewer leeways to maneuver their economies. In the US, the gruff and churlish hardliners and orthodox economists riposted, leaped in the fray, embolden and launched a rash of vitriolic attack on the economic policy, created a chasm of effectiveness of infrastructure spending. Even the Democrat congressmen dared not to mention pump prime for fear of nettling the electorates in the upcoming congressional election. The gripe of the electorate is palpable. If the economic magic wand will not work out that means more tax to pay in the future to balance the deficit.

To my thinking, infrastructure spending becomes enigma when the issue is entangled with politics. Judge the tool as it is and not on the spur. Don’t put infrastructure spending in complete abeyance, if it is felicitous and you indubitably need one to keep the momentum. Certainly you will not fritter away if it is in the hand of sagacious spender. Now that you are to adopt infrastructure spending again, it is crucial to: first, conclude the first round's experience to learn the shortcomings and prevent to make the same mistakes again. Second, since the budget deficit is high, money becomes scarce resources; you need to prioritize the projects, ensure every spending carry punch and is visible to silent critics. As to how much to stretch your deficit, there is no fix threshold, it all depends on how large the hole is to mend the economy, current deficit level and how dynamic and flexible the economy is. On the first point, most egregious we can fathom of point to the 2008 subprime mortgage woes, which interlace with the households are still not deleveraging etc, are held culpable. Of course, all these are faits accomplis and will take time to iron out. The housing sector falters, at any rate, there are other sectors remain healthy and strong, these are evidenced by listed companies’ recent corporate results, the majority are in the black and consumer confidence is holding up well. You need to mobilize all the positive and countervailing factors to make strong companies stronger to attenuate the impact of the brittle laggards. Tapping external and internal demand to fill the orders, companies envision better prospect, impregnated with optimism and start hiring, capital expenditure goes up and confidence returns. I always have confidence in US economy, because it is so vibrant and adaptable to fast changing external environment, and is always ahead of European economy. Without saying, the American will ride out the storm.

Tax is government major source of revenue. I find it interesting, especially in the US, it is tainted with polarized political inclination. On how to resuscitate the falling economy, it is said the liberal Democrats are Keynesian, they espouse government spending and the Republicans staunchly support tax cut and hope it is permanent in nature; permanent tax cut is based on Milton Freidman’s permanent- income theory and Franco Modigliani’s life-cycle theory, both theories advocate temporary increases in income due to tax cut temporary will not lead to significant increase in consumption. However, if tax cut is made long term, consumption will have significantly increase. You can learn their ideas from Republican inclined "Wall Street Journal "why they opposed President Obama impose higher tax on the rich, and how tax cut will increase revenue, save job and increase employment. This is so-called supply side economics. It prevails in the academic world in US and also in the UK; the supply side economists crank out arguments that lowering tax will improve a nation competitive advantage, attract foreign investment. Higher tax deters people continue working and prefer leisure and depending on welfare and unemployment benefits. Cutting tax on employment will boost employment in service sector and increase take home pay. Higher tax on companies will have deleterious effects on jobs, production costs, and shareholder’s income, therefore is counterproductive.

How the supply-side economists’ magic formula works to turn around the economy? The modus operandi is to cut income tax, especially in lower brackets, grant tax rebates to workers who don’t pay income taxes, reduce employee portion of payroll taxes, extend unemployment benefits, improve economic growth and boost employment. This is how the theory explicates: The grist of tax cut will have higher take-home-pay →increase household consumption→ when demand goes up→ company will increase hires → economy will continue to grow., Second, boost business investment by faster tax write off and tax credit for investment; Third, create job by giving tax credit to company for hiring workers and cut payroll taxes paid by business for employees’ Social Security and Medicare. The biggest chink is: substantially reduce tax collection; for example, cutting tax, faster write off means smaller chargeable income, give tax credit to create job, cut payroll tax all reduce tax collection.; but the supply-side economist thought tax collection can easily be improved as economy take a turn for the better, tax revenue will go up.

My view on tax is neutral, to increase or cut tax basically is situation warranted. It is impregnable that if you have budget deficit, I can’t think of other alternative than to increase tax rate to improve tax collection, or to postpone tax hike and more tolerant of budget deficit awaiting the economy fully recovered. I am leery the whole idea of tax cut and I think it is specious, obfuscate reality and stretch to a great length of credulity indeed. So to say for tax cut on individual: Which you believe is the reality that the consumer is impinged on hearing the tax cut news, the department stores are packed with more consumers who are willing to spend more because they are wealthier another $100 dollars than yesterday or you think most of them are impervious? I see no conclusive empirical evidence to support tax cut improve consumption, it is just practically difficult to measure a change in consumer behavior.

Dickering on higher bracket individual income tax payers is flabby, even there is a few percentage tax rate increases, the impact on total tax revenue collection is insignificant, because the number who pay higher tax is relatively small. No one likes to pay more tax, we are all self-centered, politician has to ineluctably redistribute the increase based on fairness, but there is no absolute fairness and only relative fairness. And tax should not be only one way up or down, it should fall when the budget returns to surplus and after account for future expansion and contingency.

The theory of supply-side economists’ tax cut on company tax is even fallible and untenable. I live in a country cut company tax rigorously and it becomes one of the tax competitive countries in the world. In my twenty years' professional career, during the budget days, none of the CEOs asked me to work out how much tax savings for the tax cut pronounced. There are two possible reasons. One, The CEOs were layman in taxation. Two, they were disenchanted, the amount was pretty paltry not worth attention. Especially when the economy is frailed or slips into recession, most companies are either incurring losses or making few crumb of profit. If company incurs tax losses, there is no tax liability; what benefit can derive from tax cut? Even a company makes a small tax adjusted profit, For example, an amount of $30,000, a 1 or 2 % tax cut work out only few hundred bucks. How this few hundred bucks make the wonder to improve economic growth; boost investment (adding new plant and equipment) and employment (adding new hire)? Probably the savings is going to be part of the CEO big bonuses. I impugn and better to leave this hoary old joke and cliché to class room teaching.

Politicians are also quick to lower business tax, and it is a cinch and just make up the shortfall by increasing other taxes, such as value added tax to improve competitiveness. They pontificate uncompetitive tax rate will result in business moving overseas, creating unemployment problems due to more plant closures. The fact is cut tax does not prevent businesses moving overseas. In reality, business leader does not assess their investment based on tax rate alone. There are a host of factors under consideration including the purpose of investment (such as company just wants to have easy access to R & D in advanced country.). Even your country has higher tax rate, but you ace on other factors, such as infrastructure, education, better business opportunities, better market potential etc., you can still be the choice of investment.

According to Wall Street Journal's report, many of the listed companies are making profit, it is unwise to give away tax revenue by cutting tax or give tax relief to profitable companies when you have a large budget deficit. Tax relief should be given to ailing companies to facilitate healing, a good example is payroll tax, if companies incurred adjusted tax loss, and have no tax liability but may have to pay payroll tax. Full refund will allow healing and alleviate burden. Business makes Capital expenditure decision on business outlook. Giving tax relief to plant and equipment to boost economy is tantamount to putting the cart before the horse.

The main driver of increasing tax revenue is the power of the economy, which relies on two factors, One is the expansion of the economic capacity, Second is the stage of business cycle. There are many avenues to collect taxes which are broad base but in a small way, such as increase tax on business of socially deleterious effects: Tobacco Companies, gaming companies, and environmental polluting companies etc. Value added tax is equally broad base, but as the economy is still fragile and unemployment remains high, it is not appropriate to impose higher tax at this juncture.

High unemployment becomes Achilles heel in America. It is possibly resulting from structural change and business cycle. Structural change is tricky and chronic. Business cycle is just a matter of time. I think jobless recovery in the long run will become a trend. If you reminisce about 2001 recovery, the lingering high unemployment impact continued to 2002 and 2003. The possible reason is employers were quick to shed staff to pare down fixed costs when economy turned bad, and the economy recovered based on GDP number which was tantalizing, but the real economy took a lull and was still teetering, recuperation was gradual and not broad base, resulting the contrasting phenomenon. This time round even worse, when economists projected a prolong recovery due to high household debts, the gloomy housing market, high unemployment, and adverse external environment. No employers would like to recruit new hires when the economic outlook is uncertain. The American economy was said to be dynamic, jobs are easily shed, but you can make up by new opportunities elsewhere. And now this invidious dynamism becomes political shackles, electorates lambasted the political leader for the wrong economic policy to turnaround the economy, resulting the economy becomes stagnant, so does the unemployment rate.

I can empathize the angst and frustration of the unemployed because I am in the same predicament. And possibly none of the unemployed American has gone through the career nightmare as long as I do. If you stay unemployed for more than six months, even the economy recovered, you will have to compete with those still in the market but job hopping. Your chances of getting back to the workforce slim by the days. Nobody is willing to give you a chance to turn around your career no matter how hard you are trying. Recruiters are looking for successful candidates. You find yourself abjectly sink to the base of the job pool.

Fume, trepidation and frustration aside, there is no miracle of immediate turnaround of job market at sight. May be the situation even more pandemonium if the Democrats are scuppered in the November Congressional election; because The majority Republican in Congress and the lame duck Democrat Administration are implacably lock horns. Party interest and ideology prevail over national interest. Bipartisan ideology is so apart to find confluence that congress becomes a vociferous battle field. Both side fingers pointing the other is playing politics. In the end, who lose the most? For employment issue, what I can say in earnest is there is no quick fix in a lukewarm economy; no party has the magic wand to extenuate moribund condition. You need someone who can decide on the right direction, hell-bent and painstakingly work the details, pulling all the plugs to get out of this economic woe.

I am suggesting a pragmatic approach which is not a panacea, may be workable for consideration. My approach is action oriented. First, you need to have a fixed establishment specifically tackle unemployment issue. The organization hires human resource experts to study long term trends, strategic goals to tackle structural issues, redeployment of manpower and job counseling services. This is a nation strategic asset, because you build your capability to redeploy manpower resources faster, you can counter any shocks while others still mire in the unemployment woes. The sine qua non for a successful establishment cannibalizes around flexible, fluid and pliant mobilization of resources to tackle issues on industries changes, manpower requirements, skill changes, redeployment, and training. Once you have a clear picture of what will be happening in various industries, you will have a good grip of future direction. Second, tackle head-on the unemployment issue, possibly from Nonfarm Payrolls,
You need clear picture of which industry shed employees the most, by how many and which category are most affected, whether the typical employer shed the most staff rehire? By how many? By comparing pre and post crisis nonfarm payrolls, you get the changes where the employees were shed the most, and keep drill down to the core to know the nature of layoff, what changes are needed. You need to speak to the industry business leaders who shed the most staff about their business prospects and the possibility of rehiring and what the government can do specifically to the industry to rev up their rehiring decision. Apply 80/20 rule, Service sector commands about 80% of employment. Suppose you know Banking and housing sectors shed most staff (under Finance, insurance and real estate). It helps you to focus and dig deeper to the source of malady when contact with job seekers which I will elaborate in the following paragraph. It also helps you to plan and decide whether to retrain and redeploy the jobseekers or let them stay in the waiting list. You need information about the chronic issues that plagues the job seekers, possibly from unemployment rate conducted by the Commerce Department of Bureau’s household survey. The purpose is not accuracy, but to study the underlying causes that impede jobseekers gainfully obtaining a job and facilitate thrash out solutions to the problems .Which solutions work best under what conditions. As you gathered the thread, you then share your winning formula with other job seekers. The dialogue with job seekers can be multi-channels: Interviewing chronic job seekers to learn firsthand the grievance they encounter in seeking the job. You can also open hotline to listen what job seekers want and what they think you can do best. This can be done at national or federal levelThere are channels providing feedback from the ground up expeditiously to facilitate quick policy change.

A powerful database at national level that captures all the jobs at one site, opening also includes overseas jobs (for those who are willing to relocate). That is the marvelous thing I came across; you save time and efforts to browse all web sites and it is low costs. For those computer illiterates, setting up physical job posts enable face to face contact and subsequent follow up.

Entrepreneuring is an old trick to reduce unemployment and encourage start-up businesses. Start-up businesses with promising prospects are given funding after adequate due diligence. The reverberation of entrepreneuring has been overwhelming which encourages niche market, new inventions and product proliferation. In no small part, it helps to alleviate unemployment as new businesses spring up.

As to the structural change due to offshoring and outsourcing, it is a real conundrum puzzled me for many years. I know the impact of globalization is inexorable. Solutions are not palatable. Albeit companies know well what the risks involved, such as rife with supply chain management risks, quality issues, intellectual property thefts etc, they continue to put their bet in overseas. The reasons possibly are: One, it changes dramatically the gross profit margin and two it expands the scope of business. And some companies even move their upstream R & D offshore. Wages are major cost component in manufacturing goods, the wage differential is so stark that it reduces your cost of sales tremendously and improves GP margin. Offshoring can also evade stringent regulation at home whether good or bad. The solution to offshoring is said to retrain workers and move up the value chain. I find it easy said than done. Moving up value chain means increasing complexity in skills. The overarching question is whether those fledgling redundant are trainable? Some unskilled workers simply do not have the foundation to upgrade to match the necessary job requirements. And there is also a problem whether the upstream have adequate openings cater for them to move up. Small wonder they can only be redeployed to service sector or continue to stay unemployed. It seems unfair due to different in living standard in two countries and the job is gone forever. This is a harsh part of life to accept the comparative advantage theory. Manufacturing moving overseas have littered with lots of social problems.

Some politicians cried out recently to move manufacturing back home. The question is not where you produce your goods but the price the ultimate consumers are willing to pay and the number of consumers that is large enough for the manufacturers to make reasonable profit. In the capitalist world, reasonable is not enough, "maximization" is the key, and Wall Street will not condone mediocre performance and is mesmerized by bonanza. At any rate, the choice is only one route, offshoring. If you can find satisfying consumers and reasonable profit seeking manufacturers, you solve the equation. What we reckon on is a satisfying customer does not mind to pay a little more for may be better quality product knowing a portion of the money will go to her countryman’s payroll. A reasonable profit seeking manufacturer is happy to get on with each day rather than anxiously beating targets to maximize shareholder value. Whether that reasonable profit seeking ideology suits your taste and philosophy of life is pivotal to making the solution viable.

Another aspect of structural change is to improve productivity. There are two type of productivity, the hard and the soft that yield more output with fewer input. The hard type is investing in physical technology to improve quality and reduce input. In other words, fewer workers are needed to produce the same output with consistent quality. Soft type is implementing management technique, such as reengineering, Activity based, throughput accounting etc, to name a few. The core concept of these management techniques is to align your business process to deliver product or service to the satisfaction of your customer; eliminate non-value added or bottleneck, you use fewer resources to produce the same amount of output. Both types are equally painful, as certain processes are eliminated and workers are made redundant. If the workers cannot be redeployed, they will be laid off. Though those fads were quiet down in the recent past, there are still companies making them as part of their operation routines. There are many books discuss the vile effects, such as low morale, stress, lower wages, low allegiance, and gone forever the sense of Esprit de Corps. The sordid affair of restructuring, according to newspaper reported was companies took advantage of weak economy to layoff workers; rapacious senior management on the other hand paid themselves big bonuses. Senior management like to pander Wall Street, cutting staff improves bottom line and resulting higher share price. So, there are genuine restructuring for survival and improve competition and also ugly restructuring making layoff to benefit oneself. Sometimes, it is difficult to draw demarcation.

How to pull all the plugs to rescue the sinking ship? The world is intertwined. The crux is to pull all internal and external positive factors to strengthen the economic muscle. In my previous article, I proposed increase government spending at many fronts. When all countries in the world adopted government spending concurrently, it became a very powerful jolt to the world economy. A compelling action applied to convulsive crisis. Some people disparaged as Keynesian, but in my mind it must be cogent if you use the right tool to do the right thing at the right time. At the time, monetary policy was well-nigh reaching its limit, interest rate was low, the market was awashed with monies, but the credit market refused to budge. A quagmire something must fill the void to avoid rapid deterioration. What I could think of most effective tool was government spending.

Two years passed, let take stock of how countries are faring. China’s stimulus howling success was much hailed and envied by the West; there are several reasons for it. Unlike many western countries, they were not severely inflicted by sub-prime woes. Their central government command and control management style was suitable for crisis management. Political fiats got down to the bottom fast rather than mired in interminable congressional bickering. The amount was scrounged a large 400 billion Yuan spending spree, mainly spent on infrastructure, many of the project had already decided prior to the crisis, the implementation was swift; and the outcome was prominent; a small part went to promoting internal consumption. In second quarter of 2009, their economy rebounded strongly and returned to exorable growth. The inimical command and control economy in our eye became their advantage. China is a developing country. They have been spending on infrastructure all these years. It came natural to be preponderant. Booming property market and government fixed asset investment became the pillars of successful turnaround. And their export sector also recovered fast, thank to the stock replenishment from the West. They got the lucky stars all come together. Their recent report card also looks good apart from high inflation due to high food price and commodity price. Of course this is lagging indicator. It is not clear when the vagaries of demand from the West weaken due to austerity package in Europe and weakening US economy, and internal consumption growth is not fast enough to catch up, how they will cope with this vicissitudes of world economy? They need plan B.

Uncharacteristically, Germany is also chalking some blistering growth, like all other exporting economy; Germany was leading the Europe in recovery. They are rich, have sound fundamentals, which do not quite consonant with their depreciating euro and export based economy. According to The Economist, they were making big bucks in newly emerging countries. Their cars Audis and Mercedes were selling well in Brazil, China and India to the newly affluents, luxury goods from other European countries are chalking big sales. It is said the spillover effects also trigger other part of EU countries growing. The latest report shows 1.7% growth, double the amount of expectation. In other words, their booming is export driven; can this trend of growth be sustainable is determined by whether they continue to have the fluke that their major importers hold up well, or else the risk of domino effect is lurking, the counter force of implementing austerity package restrains economic activities and the sheen of booming will fade. One interesting implication for their success is, how export driven economic growth spill over help to stimulate internal consumption? How significant and broad base is that?

What happen to America? Why the momentum wanes fast and the outcome less triumphal and exhilarating? I leave the soul searching part to the Americans and focus on the main theme of this article: how to pull all the plugs. I do not have all data necessary to analyze and may err. I can only show some crude ways how I will perform the analysis and what actions can be taken to pull all the plugs. America is not an export driven economy. Some economists advocate short-term stimulus: spending money to boost consumer spending, business investment, or job growth. It resonates me well, because the largest piece of economic output is Personal Consumption Expenditures. My focus is we need to have a clear picture of the strength of households spending. How severe it was dampened? Information from media pointed to us: households are not deleveraging. (My own view is don’t deleveraging too fast, the ideal speed is to follow the speed of the economy) To assess, we need more details than this (I am doubtful; whether nonfarm payrolls can give all the following information, probably it needs mix and match with other indexes or to survey from scratch):
1. The total number of working population in debt /Total working population. (in debt here means live beyond one’s means, and therefore incapacitate their spending power)
2. Total number of middle-class working population in debt/ total middle-class working population
3. Average absolute debt level/ average earned income (this is to judge how soon to turnover debt)
4. Total number of middle-class unemployed/ total unemployed population ( How much middle class unemployed will affect Personal Consumption Expenditures)
5. Changes in income level for each working class in pre and post crisis comparison.( How crisis impact on each category of working class income that affecting consumption)
6. The comparison of Personal Consumption Expenditures by Bureau of Economic Analysis pre and post crisis about durable, nondurable, and services (consumer spending about half on services), keep drill down for details shows housing, household operation, medical care, and transportation. Housing costs represent mortgage, rent payments and household operation represents payments for utilities. (This gives picture of where the spending slump is. It helps to decide the nature of the slump and the remedy. How crisis has affected the details of household spending)

Arm with these data, we are confident that we are heading to the right track. It gives clear picture of how strong the strength of household spending is. We then drill down to demographic level, which group is severely affected, which group is least affected? Geographic level, which state is affected the most? The more you drill down, you see more pictures. The purpose of doing this is three folds: One, you need to know exactly how much the household Balance Sheet is weakened that will derail the economy from growing (Part of the Personal Consumption Expenditures are missing, and to be replaced by other economic output (Gross fixed investment, sales to government or export) depending on which one is making more sense to put the house in order. Second, you want to know with present indebtedness, how soon it takes to unwind? Thirdly, you want to know where you can render assistance. You need the distribution of each category to work out the details and your action plan of your assistance. Which approach to turnaround the ailing state is most feasible, at national level or federal states? Remember, the Federal states and Washington is symbiotic relationship. The role is somewhat of a parenting facilitating role that share resources, pulling the strengths to reorganize and restructure, assist in implementing programs such as promoting investments to revive the state economy. I think it certainly will help. If you don’t render your assistance to the ground, things will change very slowly.

Working on this part is crucial on the way back to revive the economy; it directly tackles consumption, unemployment, and restores confidence and it is the epitome of the whole economy health. With the aid of this information, you continue monitoring the progress, spotting bottleneck and eventually bring the economy back on track.

The next step I will do is to mend the hole? I will not quickly jump to conclusion that housing and banking sector are the biggest holes. I assume I know nothing about what happen to the economy and start from scratch. I will dissect the economic data that made up the GDP number, it is a matter of reduction of how the numbers are compiled, keep drilling down to give me a complete picture of the economy and comparing each component ( Consumption, Investment,Governmant, Export, Import) Pre-crisis and Post crisis to identify holes. I want to find out the following:
1. Which components have made significant changes pre and post crisis?
2. Which components have faded, stagnant or rising?
3. Which components have the potentials of pulling for growth?
4. Playing what-if scenarios: If you single out the growth of one or two sectors, For example, housing and Banking sector because of zero or low growth. Where can you pull the plug by finding growth in other sectors to patch the void?
5. Projecting a worst case scenario that US economy deteriorating fast, Europe economy is close to recession and China economy is struggling to keep afloat, which component will have better chance to arrest the situation not becoming worse.

I will form a team with diverse background, so that I can see problems from different point of views. The comparison of pre and post GDP figures will show which components are bloated in the pre-crisis need downward adjustments. The main purpose is to identify holes. The components (Goods, Service, and Construction) that the economic activities are declining, stagnant and missing are defacto holes. Residential fixed investment is only a small portion of economic output. What our concern is to revitalize total strength of the economy using external or internal countervailing forces and mitigate the adverse impacts. Until you have good knowledge of the true picture of the economy, you are not ready to mend the holes. You can also compile a budget that is realistic to measure your progress.

Some thought that so long we propped up the housing market, it would stop declining, and the housing market would turn the corner. What I can say is there is no easy way out to clear the housing sluts. Anyone claims to have quick fix is devious, an intention to delude and obfuscate the electorates. You can only set free by knowing how you were entangled. You may want to review regulations that impede buying transactions. The housing sluts will eventually ameliorate when the economy is back on track.

Supposing exporting is part of the action plan to jolt the economy, more dialogues with the business leaders and the government playing facilitating role are essential. Business sense is important here. Business leaders know where to target market better than politicians. Dialogue is to listen how to play the facilitating role better. In fact, in America there are plethoras of lobbyists advancing interests for the powerful business segments. But there are differences between dialogue and lobbying. Dialogue is active participation in communication, is in control of the outcome.

A case in point for export is export to China; current account deficit has plagued bilateral relationship for years. The US insists China to appreciate her currency, claims that the Chinese deliberately manipulated the Yuan value so low to boost her export. I have no qualms that the Yuan is undervalued, because their economic fundamentals are strong relative to the US, as to how much undervalued is everybody guess.

The Economist used “The Economist big Mac index” in the recent comparison, showed around 48% undervalued. Big Mac is a crude valuation. It uses purchasing power parity theory or the law of one price as the basis for comparison. The theory in layman term means if the rate of inflation in country A is greater than country B, the rate of exchange of the country A will fall against the currency of country B. The currency value can also be derived from “Irving Fisher’s interest rate parity theory”. In simplicity, it means interest rate differential in two countries is equal to difference between the forward and spot rate of the exchange. All these are text book stuff you can learn in Corporate Finance. In real life, for sure the currency traders don’t use this simplified expectancy theory to trade their currency. Some use sophisticated computer currency modeling techniques to calculate currency value. Most in the currency market watch for Central Bank behavior (interest movement), a nation’s trade balance (To correct imbalance, deficit country has to depreciate their currency), commodity prices (move in tandem with the dollar) and domestic equity market strength (reflect the fundamental of the economy), Supply and demand of spot and forward market. Currency value is the fuzziest thing in any valuation.

As far as I came across what others valued Yuan, undervaluation can be as low as below 10% to as high as over 50%, why the difference is so wide? The reason is possibly no one tool can give the necessary precision as the input variables are largely uncertain. The brawl can be stopped by encouraging the Chinese to convert from managed float to free float. The problem with free float is currency may subject to wild swing due to speculation, like the Japanese Yen, recently shot up to the roof to around 82 Yen to a dollar due to carry trade. A wild gyrating currency is bad for business planning even though there are tools for hedging and it encourages companies move overseas leaving the country with chronic unemployment. China is now using Hong Kong as stepping stone to migrate to convertible capital account. I think they will use managed float for a while before converting to free float. As now many countries are mesmerized by the prospect of selling more goods to China. They wish the Chinese Yuan to appreciate help their export. China’s recalcitrant stance incensed the West. But the Chinese thinks other wise. I read a book recently written by The Economist’s ex-correspondent in China, he interviewed an ordinary person in Shanghai about the currency row with America. The Chinese did not think their currency is undervalued, the hostile attitude towards China is the problem, labeled the US as big bully, hegemonist. I read an article written by a Shanghai professor, according to his own valuation model, the Chinese Yuan is not undervalued; it goads the Chinese if they think their currency is not undervalued why the West keep pushing them to the corner? There engenders the big bully theory.

Currency issue is so abstruse that not every ordinary people can comprehend. This stodgy and insipid verbose is to highlight one point about different perception of two parties. The Chinese have mix emotion towards the America and can be easily provoked to be nationalistic. Why should I buy Ford or Chrysler? To the new rich, they will turn to give chance to the German by buying Mercedes or Audi, Japanese Toyota, Honda or Korean Hyundai. It boomerangs due to lack of political adroitness. “If you can’t help me, at least don’t be my stumbling block.” American Businessmen howl. It is not ingratiating the Chinese consumers and feel stigmatized, but don’t let business tainted with political righteousness. There are many American businesses have been in China for more than twenty years. They know the right way to do business in China. A dialogue with them will help the politician make a better trade off in political decision.

The human frailty in crisis is a smack of selfishness, each one is eager to get out of one’s excruciating economic woes and elbow the way out; by that is a no body win game. Instead of contriving to make the matter worse, emphasizing rapprochement and adroit negotiation skills are paramount. The key is to trade interests. Trading interest can better achieve each party objective, everyone gain, because interests change behavior.

I hope this piece will help.