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Posted: September 01, 2010

Rundles wrap up: the confidence game

Jeff Rundles

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Early last month the San Francisco Federal Reserve Bank, in its regional Economic Letter, suggested that the probability of another recession gripping the nation within the next 18 to 24 months is higher than there being an economic expansion. The reason: Consumer confidence and spending have dropped, and private-company hiring is well below expectations.

There's a lot to be said for this point of view, and it is very important for all of us to focus on consumer expectations and jobs. Wall Street has posted significant gains over the last several months, but look closer at the corporate earnings reports fueling the surge and you'll find that corporations have beefed up their profits at the expense of jobs - jobs once held by those very "consumers" whose confidence and spending have fallen.

It's no wonder consumers have no confidence. Those who have jobs have very little confidence that their job will continue, and those without jobs have almost no confidence that they will find one anytime soon.

If you think about it, it's a kind of confidence game. But the trick here is that this confidence game, involving the jobs of Americans, is not something new. This has been going on steadily for decades. Solid American jobs, those involved in the building of wealth through production, have been going overseas since at least the 1970s, and ever since then we have been involved in the smoke-and-mirrors obfuscation that Wall Street is Main Street.

It isn't. It used to be that the largest corporation in the country was General Motors, which employed hundreds of thousands of people in relatively high-paying jobs. Now the biggest companies are retailers, whose own workers can't afford health insurance or to buy a new car, and oil companies that represent billions of our dollars going overseas.

Government, or at least the way we have come to understand the role of government, cannot be the font of jobs. Private companies must be, and they have to be good jobs, the kinds of jobs that create consumers with the wages and confidence to spend money.

The only way to achieve this is to produce. We need to make more cars. We need to manufacture televisions, apparel, shoes, steel, tractors, computers, crops and everything you can think of. And we need to make these products and then sell them to the Chinese and the Indians and the rest of the world. What we have decided to do instead is conceive these products, finance their production, and let the rest of the world have the jobs involved in the manufacture. That's good for investment bankers and financiers, not to mention corporate earnings, but it isn't any good at all for America.

Why? Because it narrows wealth. Back when America was the production capital of the world, our corporations and Wall Street generally made a ton of money, but so too did the little people.
Over the last two decades or so, we have been operating under the illusion that tax cuts for the wealthy and corporations will drive them to reinvest the savings that will trickle down to the populace.

I believe we should do this in a more targeted way. Cut taxes, on both corporations and the wealthy, and also cut capital gains taxes, even drastically, but only in return for specific investments, like American jobs and American production. Do the same with domestic energy exploration and mineral production. Overall taxes on corporations and the wealthy would fall, which is their incentive, but overall tax collections would rise, and along with that personal incomes of everyday people would rise as well. Plus, instead of exporting jobs, we would be exporting valuable goods, which builds wealth up and down the socio-economic ladder. Would things be more expensive? Yes, but we'd all have the money to afford them.

You want consumer confidence to rise, then stop the confidence game that exporting jobs and basically becoming the world's middle man is a benefit to everyday Americans. What made America great in what turned out to be The American Century was production that made us - all of us - highly productive and highly affluent. Investment banking, and Wall Street at large, needs to be guided back in 
that direction.
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Jeff Rundles is a former editor of ColoradoBiz and a regular columnist. Email him at jrundles@cobizmag.com.

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Readers Respond

The USA is the best and cheapest place to manufacture if the exchange rates are fair. If China gets to set its own exchange rate so they get all the manufacturing, then why don't we tell the Bank of International Settlements that we will set our exchange rates. By Joe Doll on 2010 09 14
I agree with your article but there is a strategic side of all of this regarding sourcing as well. With China producing key componets like all types of batteries, computer keyboards and other like goods, what happens when the supply is interrupted or cut off completely? The bootom line is that wealth is created when things are produced by adding value along the way. In a service based economy like ours, things come apart pretty fast when the volume of activty is reduced like we have right now. Companies down size and its more about wealth redistribution than creation. By Lonnie Parsons on 2010 09 13
Excellent point Mr. Rundles and sounds like you've hit the nail on the head! My husband has been unemployed for 18 months and there is no end in sight. No college degree, but a degree in experience doesn't seem to count anymore. We are in our 50's, no health insurance, lost our home and this is all due to no stable employment for the past 7 years. Several layoffs later, we are in the worst shape we've ever been at a time when we should be thinking about being able to slow down and retire. We went from annual income of over $100k in 2003 to just over $40k now and it's a struggle. Every job out there wants a bachelors degree at minimum, or he is "over-qualified" for entry level. No such thing as a "foot in the door" anymore. I have no idea how long the business economy can sustain itself selling from business to business, but if they ever want consumers to have buying power again, something's gotta give. By Sue on 2010 09 09
I think that you are dead on with your statement that Wall street and Main street are two different things, and that Main street is the more important measure. However, 'bringing the jobs back home' will cause greater issues ignored in your analysis. This is the currency problem caused by the Federal Reserve Act of 1913. I don't know how we managed it, but some decades ago, we hoodwinked the world into accepting the Federal Reserve Note (FRN) as the currency of international settlements. This created an international demand for the FRN, and allowed the FED to print up (inflate) the money supply. The fact that other nations needed FRNs for international trade ensured that this inflation of the money supply was masked by increased demand without complete collapse of the currency's value. (even at that, our 'dollar' has a value of about two cents in relation to its 1913 purchasing power). Eventually, there was enough currency in circulation to meet all settlement demands. If a new demand for the FRN was not found, the party would be over and the FRN would go the way of the currency of the Weimar Republic. I don't know if it was intentional or coincidental, but shipping production overseas created a demand for the FRN overseas. If we stop buying from other nations, those nations would no longer have a desire for FRNs. Not only will they stop acquiring FRNs, they will divest themselves of their current holdings. All those FRNs will come flooding back home, leading to a hyper-inflationary death spiral of our currency. By Nunya Bidnez on 2010 09 09

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