The Kahuna's rant of the week: Economics for politicians, by Tobin Smith

I can't stand it. A week away from the day-to-day barrage of data and noise and NOTHING has changed.
Sometimes I think everyone who invests in stocks for a living is a Junior Chartman or running for president.

All I've heard about the market from trading desks this week is the same thing I heard two weeks ago:

1) Technicals continue to deteriorate and EVERY trader is a technician. (They would trade dog vomit if there was a bid and ask.)
2) There's no value to be found in the market. (Although when pressed to define value, they say "charts look crappy.")
3) There are no catalysts on the horizon (unless we pass some key technical resistance points or get a good job report).
4) The market is not dropping hard enough to create fear and not rallying enough to create sustained buying.

The basic fundamental analysis of the market is this:
When investors SEE job creation from the Corporate Employment survey, the market gets new life. Without decent numbers (i.e. more than 100,000 jobs) added each month, the market goes nowhere.

And, of course, if you listen to Kerry and Edwards on the stump, every father in America stands fearful of going home and confessing to his little daughter that Dad has lost his job to a worker in Bombay.

Now I don't want to get on a rant here (with apologies to Dennis Miller), but this LUNACY about job creation and destruction in America MUST END -- or at least they need to get the concept right!

Since Edwards has spent his life as a class action lawyer and Kerry as an elected official, their complete lack of knowledge as to how the real American economy works is quite understandable.

But you, ladies and gentlemen, MUST keep your wits about you as the manager of your stock portfolio.
This epidemic case of "Oh woe is me -- America's jobs are going to India and China and America is about to become a second-rate economy" has been spreading faster than Janet Jackson's Super Bowl clip on the Internet.

And it is absolutely WRONG, WRONG, WRONG. The degree of ludicrousness associated with the daily barrage of false data, distorted economics and flat-out bull has now reached an important tipping point: this crap is being told, sold and retold so often in the media that people are now starting to believe it simply because they hear it so often.

We got a glimpse of this urban mythology this week with the lower-than-expected consumer confidence numbers.

Well I, for one, am NOT shocked by these numbers. If you watched or read media reports over the last few weeks, you'd be less confident, too.

STOP THE INSANITY, for crying out loud. Stop for a moment and come back to mother Earth.

Our economy is the world's greatest job creator because it has consistently been the world's greatest job DESTROYER, and it has been for decades and decades. This job destruction averages about 10% a year since the early '50s, according to the Census data available on the Bureau of Economic Analysis website. This means with 135 million Americans employed, we'll destroy 13 million jobs in 2004 -- YIPEE!

What these self-appointed disciples of economic gloom and doom can't seem to fathom is that this ghastly ghoulish thing called job destruction has been the secret to the ever-greater job CREATION within our economy.

Our economy is a churning economy, not a static one. We create jobs by creating new industries and services that replace old, obsolete ones. France and Germany are static economies. With 59% of the population working for the government in France, they have little job destruction. Of course, they also have virtually ZERO job creation.

You don't get one without the other in free market capitalism. The reality is that only a very small fraction of jobs destroyed go overseas -- less than 5%. We destroy 95% of jobs ourselves -- it's called progress, innovation and productivity.

High schools teach this axiom of market-based economics. Maybe Edwards and Kerry just need a refresher course.

And the Republicans get NO higher points on this issue, either. Their pandering for ANY vote possible is as obnoxious as the Kerry/Edwards fibfest.

Greg Mankiw, the recently appointed chief economic adviser to the president, has the audacity to suggest that a basic law of economics proven almost flawless over the last 200 years (the law of comparative advantage, for all you econophobes) is still right. and gets excoriated for it.

Look up David Ricardo on Google some time, his brilliance continues to shine to this day. Using his famous example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo's argument was that there are gains from trade if EACH nation specializes completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good.

As far as growth is concerned, Ricardo further postulated that foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically -- thereby leading to a lowering of the real wage and a rise in profits.

Ricardo's law of comparative advantage has been proven right for centuries -- that overall income levels would rise in both nations as long as comparative advantage prevailed.

Mankiw's example of an Indian radiologist's analysis of an American patient's X-ray via the Internet is a MARVELOUS example of comparative advantage at work.and yet Bush's team spent the month after his supposed gaffe spinning his absolutely correct analysis into complete inanity.

If you want something to really fear in our economy, you have every right to be SCARED TO DEATH about our fundamentally out-of-whack "social overhead": the egregious corporate tax rates, litigation costs, pollution abatement, federal mandates, regulatory compliance and runaway health benefit costs.

Obscenely high fixed non-wage overhead is the creator of offshore job transfers in this country.and I can prove it.

The Wall Street Journal's Holman Jenkins points out the facts that I see every day -- that wages account for only about 10% of manufacturing costs.
Yes, Kerry, Edwards, et al -- learn to read a friggin' P&L report before your mouth writes a check your body can't cash.

Chinese or Indian labor costs DO NOT make our goods too expensive. It's the 90% from other costs that do.

So, ironically, the lower cost of healthcare associated with offshoring radiology analysis to India saves, not destroys, American jobs.

This fact is so counter-intuitive, but it is one that you MUST comprehend to not fall to the siren song of economic Armageddon that is being sold by the Dems this election year.

And you would vote for protectionist laws against offshoring, too,and sign a death warrant for our long-term economic growth and vitality.

Our churning system works.
Between 1980 and 2002, our population grew by 23.9%, according to the Census Bureau, but the number of employed grew 37.5%.
Today 138.6 million Americans are at work -- record levels as a proportion of our population.

Of course, jobs will move with irreversible shifts in the nature of our economy. These shifts in the makeup of our economy are the innovation and magic of technology embedded in our unique system of creative destruction.

We don't export consumer goods to China -- so what? We export capital goods and natural resources and intellectual property worth 100 to 10,000 times a night shirt or set of BVDs.

We NEED offshoring of the low-end labor in our service and technology industries (now 78% of our total economy) so that corporations can earn the return on capital they need to invest in the R&D, the brainpower, the branding and the information technology we need to KEEP our productivity and innovation edge.

If you or a loved one lost a job as a bank teller or telephone operator, I "feel your pain."
But I do NOT care whether you lost your job to a call center in India or a computerized ATM machine.

Now you have the time to learn to do something better than someone else can and charge a higher rate for that service. That's called free market capitalism.

If only you had to have a license to run for president that says you passed Economics 101.

The author suffers from the myth that past performance somehow guarantees future results. It isn't necessarily so (read a mutual fund prospectus). Certainly he offers no glimpse of the possible industries that are supposed to crop up and provide those jobs.

This is really the crux of the problem for most people. There isn't any obvious work available comparable to what we are outsourcing. Even the defense industry is doing more for less. Hiring back people with old clearances and not bringing anyone else in. In the '80s there was plenty of defense work that didn't require a clearance.

so, just to work that up, are you saying that what worked for the first 225 years , including the annual job destruction versus the annual job creation, no longer applies?

Could it just be possible that it still does? Limited only by the imagination of those who wish to work?

I have been, and am still, attempting to defend both sides (one at a time) in order to gain an appreciation for why principles previously sound, no longer apply. Not necessarily performance, principles.

...Certainly he offers no glimpse of the possible industries that are supposed to crop up and provide those jobs.

What if I could give you a glimpse of where and what I think the jobs of tomorrow would be. If you're interested in my opinion it's post #31 on this very link.

I thought so as well.

Adds another dimension to the discussion. Also, it moves the job numbers to incidental from the primary focus.

If in fact we have lost 10% of the existing jobs per year (then met and surpassed that number in new creations on positive years, with a net positive number), why is the current annual 10% loss (average) such a news item? Why not last year, why not from 92 to 2000? In fact, the last time it was a "catastrophic calamity" (as reported in the nightly news) was during president Reagan's terms.

I tend to agree with the core concept, that the pressure of job loss over the 225 years of this country is what has led to continual new innovations and subsequent economic strides never before seen.

I believe this is a major contribution to the fact that the US populace lives in more comfort, and better health than the reminder of the planet, often quite striking in level of comfort and leisure time.

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