Archive for the ‘Economy’ Category

A “Blue” Economy: 12.2% Unemployment & Vacant Storefronts in Rockford & Freeport, Illinois

In Economy, Illinois, Unemployment on February 5, 2012 at 3:22 am

Remember when gas was $1.86? Long vacant gas station on main drag (Bus'n US Route 20), one block from county courthouse, Downtown, Freeport, Illinois.

Vacant storefronts in downtown Freeport, Illinois.  Read the homemade sign on the left: 3 story commercial building for sale for $30,000.
Today, we get behind the numbers to see what a high unemployment, dying “blue state” city looks like.  The unemployment rate in very ‘blue’ Illinois is 9.8%, [1] more than a percent above the national rate.  The Illinois economy is dire, no question.  The Rockford-Freeport-Rochelle Metropolitan Statistical Area had one of the highest unemployment rates in the entire United States at 12.2%. [2]  Freeport is located 25 miles due west of Rockford on the busy four-lane, limited access highway U.S. 20. 
On Forbes’ annual list of the most miserable cities, Rockford is usually there.  “Rockford has unusually high violent crime rates for a city of its size. Most notably, the city has the fourth highest rate of aggravated assault in the country, with 10.5 cases for every 1,000 citizens in 2010. During the same period, 20 murders occurred, almost double the number in 2000.” [3] “Property tax rates were fifth highest in the country in 2010. The median tax bill was $3,234 on home values of $136,000 for a rate of 2.4 percent.” [4]  Freeport is smaller and included in the greater Rockford unemployment data above. 
I was in Freeport today and took a few pictures downtown.  Most old cities have a ‘bad side’ of town.  I did not cherry pick bad areas for pictures.  The pictures are not taken in one of the far-worse looking slums of Freeport (most cities have a slum), but rather, these pictures are all in the downtown area.  In fact, on the southeast edge of downtown are two square blocks of hulking, long vacant factories, the one-time home of the manufacturer Rawleigh, which left some 45 years ago.  Companies come and go; what is concerning is when companies that left a half century ago are never replaced.  The main drag, Business US 20 has no less than four abandoned gas stations spread through various neighborhoods, including national names like Mobil and CITGO; this is a bad sign about the local economy.
Freeport is a county seat (Stephenson County), which guarantees a certain amount of economic stability with the offices of courts, sheriff and other administrative government bodies.   Unfortunately, there are few prosperous commercial areas in Freeport.  Like most cities, there are some big box stores on the edge of town (Wal-Mart, Menard, K-Mart, Shopko, Staples) but even the retail edge of town has a surprising number of vacant retail properties.
The chart below shows how Freeport has been in decline, though it briefly turned around its population declines in the 1990s, before more recent declines.
Year Freeport Population
1970 27,736
1980 26,266
1990 25,840
2000 26,443
2010 25,638
  Chart by Author [6]
Freeport is located on a busy highway that runs to Rockford, before allowing one to take either I-39 or I-90 to Madison, Bloomington or most importantly, Chicago.  Freeport is about 110 miles from Chicago, but less than 80 miles from Chicago’s northwest suburbs.  Both Rockford and Freeport are located reasonably close to Chicago with good expressway access, which could be an economic selling point.
I should point out I do not mean to pick on Freeport, but rather to use it as an example of what has been happening in hundreds of small cities in high tax, pro-union “blue” states.  Freeport and its eastern neighbor, Rockford, Illinois have the unfortunate distinction of also being part of politically corrupt and ineptly governed Illinois, where the last two Governors reside in jail, at the same time both cities are a very short drive from more business-friendly Wisconsin and only an hour from right-to-work Iowa.  The unemployment rate in Wisconsin is much lower at 7.1% and Iowa even lower, just 5.6%! [1]
Those state comparisons mean something.  Certainly when you drive just 20 miles north of Freeport into the small city of Monroe, Wisconsin, the differences are great.  Monroe is more prosperous, has newer industrial plants and lacks the vacant buildings of a Freeport.  Iowa is a bit further, but there is a contrast between, say, similar sized Clinton, Iowa, on the Illinois border.  Clinton has several large, new industrial facilities, especially a newer complex from ADM. 

More vacancies, downtown Freeport, Illinois

I think people in Illinois need to be honest and ask themselves why the Illinois economy is so bad.  I know liberals who love to make excuses for Illinois.  They say Illinois is too cold.  Except Iowa, Indiana and Wisconsin are no warmer!   Lots of ‘cold’ states have better economies than Illinois.  Then they say Illinois is a better place culturally (meaning Chicago) than Wisconsin or Iowa or Indiana and companies should want to open up in Illinois because of, say, the wonderful Lyric Opera in Chicago.  The cultural benefits may be real but are not winning the race for jobs.  These same liberals are then stuck essentially telling people in Freeport and Rockford they are better off unemployed because Illinois is a very blue state and if companies won’t locate in Freeport or Rockford because of Illinois’ adversarial attitude toward commerce, so be it.  Live ‘blue’ or die.
Freeport’s people are friendly and I have no reason to think they are any less hard-working than anyone else.  I have known many, many people over the years from Freeport and Rockford and think well of them.  The area was long respected as a home to many highly skilled blue-collar workers.  There is some history there and a sense of civic involvement.  So why is the local economy so poor now? 

More vacancy on main drag (US Bus'n 20), Freeport, Illinois

Surely there are many reasons.  Not only Rawleigh but many other companies have left Freeport.  Newell-Rubbermaid company moved its corporate headquarters to Atlanta last decade, taking some good jobs away.  But, in the end, discussing why such and such a company left does not really do justice to the numbers.  People can make excuses.  But why is unemployment so much higher in Illinois, especially in small cities like Rockford and Freeport? 
One reason has to be how rarely anything new moves in.  A city like Freeport or Rockford seems to be focused on a sort of whack-a-mole battle to keep what it has from leaving; Illinois does this at its state level with tax incentives for whichever big Illinois employer is asking for them.  If economic development were a sport, Illinois would be accused of playing defense with no game plan for offense.  Driving around Freeport you see some sizable manufacturing operations: a tire plant, several Honeywell locations and a Vitners potato chip plant.  But you see nothing of note that has been added in recent years. 

Blue Economy, Downtown Freeport, Illinois

When you look at Freeport or Rockford, you see a once proud city of good citizens stuck in a deep economic rut.  Freeport keeps losing residents, which only makes a bad situation worse as city infrastructure stays the same but there are fewer taxpayers to support it.  I think the solution to Freeport’s problems lies largely outside of the city’s control.  The issue is the Illinois business environment.  It is fascinating how much better off nearby Wisconsin and Iowa are.  It is as if there are invisible “Do Not Cross” lines at the Illinois borders that tell employers to stay away.
I sincerely think one of Illinois’ greatest problems is Chicago’s political domination of the State.  Chicago can muddle through high levels of taxation and anti-business legislation because it has two of the world’s elite private universities (Northwestern & University of Chicago), cultural amenities that people will pay extra for, and Chicago is a services economy.  All the computer programmers or other young professionals at consulting firms or Groupon in Chicago are not impacted at all by pro-Labor Illinois rules.  But, the rest of Illinois does not have Lake Michigan as its front yard and lacks the universities, services sector, airports and the cultural amenities Chicago has.  The rest of Illinois simply cannot compete with other states.  Downtown Freeport and a sad number of other Illinois places show the result.  It impacts people like the owner of the three story Freeport commerical building who is asking only $30,000 for his vacant building (see second picture from top).  As do the legions of unemployed in Freeport, Rockford and other Illinois cities outside of Chicago. 

Another vacant storefront in downtown Freeport

[1] December 2011 state unemployment rates from, retrieved 2/5/12.
[2] December 2011 data retrieved 2/5/12 from
All pictures by author.

Irrational Exuberance about Spotting Bubbles

In Economy, Financial Crisis, Real Estate Bubbles on November 29, 2011 at 1:01 am

An excellent and brief article well worth reading is: “The Extraordinary Popular Delusion of Bubble Spotting” by Jason Zweig in the Wall Street Journal.

It is sobering reading for anyone who believes financial crises will not occur as long as wise government regulators are emboldened to pop bubbles.  The most obvious flaw to the bubble popping dream is bubbles are only obvious in retrospect.  How many identified the dot-com mania of the 1990s?  The real estate bubble of the 2000’s?  A handful of commentators and academics identified one or the other; the economist Robert J. Schiller actually identified both bubbles.

Mr. Sweig’s article, found here at, cites recent research from Andrew Odlyzko, who looked at the huge railroad stock bubble that burst from 1845-1850.  Railway stocks declined by 2/3, a drop of $1 trillion in today’s money.   Mr. Odlyzko noted the famous Scottish journalist, Charles Mackay, in 1841 had published the book known today as “Extraordinary Popular Delusions and the Madness of Crowds”.  It turns out the apparent bubble expert turned shill just a few years later.  In 1845, Mackay wrote, “those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger….There is no reason whatever to fear” a crash.


Another issue I see in the case for bubble popping is that regulators are humanThe politicians who oversee regulators are even more human in the sense they are reelected by keeping the public happy.  How many politicians ever push the Federal Reserve to raise interest rates to cut off a speculative bubble?  I am not so optimistic regulators pushing back on Fannie Mae and Lehman Brothers in the 2000’s for subprime lending would have been welcomed by very many. 

When a bubble inflates, it makes money for a lot of people.  In the 2000’s real estate bubble, the list of winners included appraisers, Realtors, mortgage brokers, mortgage lenders, title insurers, professional real estate flippers, home improvement chains, remodeling contractors, furniture stores, homebuilders and all the companies that supplied them, as well as millions of voters who sold their homes for a quick profit or stayed put and watched their home equity rise.  Many of those homeowners took out home equity loans or enjoyed “cash out” refinancing, which allowed them to take a vacation, buy a plasma TV or build a swimming pool using paper profits on their home.  How many politicians, even if they really saw a bubble, were willing to stand up to all those interest groups and essentially tell the average voter “your house is worth less than you think, it is time to pop the bubble by making it harder to sell your house through tougher mortgage standards and higher interest rates courtesy of the Federal Reserve”?

I ask of anyone who is highly confident in the government’s ability to identify stock market bubbles, is there a bubble today?  If so, where?  In tech stocks like Groupon and, speaking of real estate,  In gold?  In solar firms and electric cars?  My guess is a bubble may now exist in US Treasury bonds, which pay virtually no interest at all, despite the possibility of future inflation.  If there is a bubble, say in social media companies, how should the government go about deflating the bubble? 

Bubbles happen on a recurring basis.  There usually is an exciting new technology (e.g. railroads, rubber, automobiles, plastics, uranium, oil, 1980s farm land, the internet, fiber optic cable) that truly is changing the economy, enjoying explosive revenue growth.  There typically is at least a kernel of truth in the bubble boosters’ claims. 

Valuable Real Estate: London, UK. Photo by author.

In the recent real estate bubble we heard “they ain’t making more land,” population was growing and interest rates were at historic lows, meaning monthly mortgage payments were easy to afford and higher leverage looked rational.  As always happens with bubbles, a feedback loop grows.  People are making money flipping stocks, flipping houses, flipping tulip bulbs.  Friends and family see the easy profits happening and they get it on the game, meaning even more speculative demand, leading to ever higher prices.  Access to low-interest rate credit only adds more air to the speculative bubble.   Valuation becomes unimportant.  To top the valuation problem off, the very fact that the bubble asset is increasing in value reinforces the rising values.  This happened in the 2000s as rising real estate prices meant appraisals kept rising with the ever higher prices of nearby homes.  As long as you value an asset by what it can fetch in today’s market, you are at risk of participating in a bubble.  A safer method of valuation is a fundamental valuation based on discounted cash flow or at least a ratio (e.g. Price/Earnings or “P/E” ratio) which ties the asset back to its income earning potential.

Some bubbles aren’t large enough to matter to the overall economy.  Some deflate without causing an economic crisis.  Other bubbles burst and bring great short-term damage to an economy and society.  Given that bubbles can be so dangerous, it is only natural to want to embolden some wise power to deflate them.  

Granting someone bubble popping power also creates the possibility of a false positive: trying to deflate a “bubble” which may not actually be a bubble.  We have heard for decades the real estate in certain high-priced markets like Manhattan, San Francisco and London is fundamentally overpriced.  But is it?  Perhaps the higher wage earning potential and high demand for property in those land-constrained cities does justify the real estate premium vs. smaller cities elsewhere.  Some internet stocks were a bubble, yet others like Google and Amazon once seemed overpriced to many, only to prove the doubters wrong.  That is, unless those stocks were to crash tomorrow because of some previously unidentified flaw in their business model and disprove the statement I just made.

The problem is who, exactly, can identify a bubble and then prick the bubble, even when it makes voters angry?  What bubble(s) is inflating right now?  One way we can individually fight the next bubble is to keep our heads about investing.  If all our non-expert friends and relatives are bragging at dinner parties about their investment in the “Next Big Thing” because it keeps going up in value, then maybe we should research and understand that Big Thing before we bet our life savings on it.  Unless, of course, it is 1984 and your friend is talking about some new company named Microsoft. 

Bubbles and Charles Mackay pictures from Wikipedia Commons.

$26 Billion Failed To Stop Housing Market Decline

In Economy, Housing Bubble, Obama Administration, Tax Breaks on November 13, 2011 at 12:23 am

I recommend a Marketwatch story, , which follows up on the home purchase tax credit “Stimulus” programs of the Obama Administration.

We are reminded about the $8,000 tax credits that were mailed out to home buyers in 2009 and 2010.  Using recent data, we see most of these home buyers are worse off, even with the credit, because of the continued slide in home values.  That is sobering: the government spent $26 billion on home buyer subsidies and the average qualifying buyer made a losing bet even with the government money.  The average home dropped by more than $14,500 since the time of the tax credit, which more than offsets the $8,000 tax credit.  Needless to say, the taxpayer is worse off, too.

The graph below demonstrates this.  The tax credits helped cause a temporary halt of the decline in 2009 as home prices briefly increased.  Then home values went back to their decline after the credit ended in June 2010.  The real estate market had not yet cleared.  All that government money only delayed the inevitable, actually extending the housing recession by pushing back the time when housing would hit its trough. 



Graph from Wikipedia Commons, retrieved 11/12/11,

Picture from Wikipedia Commons.

Ford Anti-Bailout Commercial Censored By Obama Administration

In Economy, Ford Motor Company, Freedom of Speech, Government Bailouts, Obama Administration on September 28, 2011 at 10:23 pm

Despite Constitutional protection for freedom of speech, the Obama Administration pressured the Ford Motor Company to pull a video ad.   This demonstrates exactly why the government should never, ever own private companies; the temptation is too great for the government to pressure and handicap competitors (e.g. Ford) of the companies owned by the government (e.g. Chrysler and GM).

I do not care what justification the Obama Administration uses for pressuring Ford.  There is no justification because the federal government should never be favoring one company over another.  Washington should not be interfering in the advertising choices of a privately owned company.

The actual facts make this even more distributing.  The ad series features Ford customers who make unscripted remarks about why they buy Ford. [1]    Daniel Howes of the Detroit News reports, “a guy named ‘Chris’ says he ‘wasn’t going to buy another car that was bailed out by our government.’  Ford pulled the ad after individuals inside the White House questioned whether the copy was publicly denigrating the controversial bailout policy.”

In the ad, Chris says, “I was going to buy from a manufacturer that’s standing on their own: win, lose, or draw. That’s what America is about is taking the chance to succeed and understanding when you fail that you gotta’ pick yourself up and go back to work.” 

It is wholly inconsistent with economic freedom and American capitalism for any White House to pressure a private company to pull its advertisement because the government doesn’t like the way it portrays another company.  

Ford Drive One Ad

[1] “The unscripted ad, filmed in a mock “press conference” format, featured an F-150 owner named Chris who supported Ford” in


Obama Jobs Solution: Suing Employers For A Job?

In Economy, Job Creation, Lawsuits, Obama Administration, President Obama, Unemployment on September 27, 2011 at 8:07 pm

The “Jobs” Bill that President Obama sent to Congress “includes a provision that would allow unsuccessful job applicants to sue if they think a company of 15 more employees denied them a job because they were unemployed.” [1]

While I understand the frustration of the unemployed, the President’s idea is likely to be counterproductive and lead to even less hiring of the unemployed.

Lawrence Lorber, a labor law specialist who represents employers, said Mr. Obama’s  proposal “opens another avenue of employment litigation and nuisance lawsuits.” [1]  Most employers are small and do not have lawyers on staff to defend against these lawsuits.  Even larger companies with a slew of in-house legal counsel have no desire to be sued over matters that are difficult to disprove.

Why would an employer discriminate against the unemployed?

(1) It is an open secret in the business world many employers formally downsize under-performing employees in order to avoid law suits.  A downsizing of just one person in a large company may actually be a polite way of firing an underperformer.  Most workers are the member of some protected class (female, racial minority, veteran, over age 45, etc.).  If the underperforming employee has not made themselves easy to fire (e.g. by repeatedly skipping work), it can be difficult to prove in Court the subjective judgments that a particular employee’s work is mediocre or worse.  Defending a wrongful termination case is something many companies try to avoid.  Even when the company wins, it racks up legal expenses.  Many companies feel it is better to pay a small severance package and let the employee be downsized “not for cause” rather than terminated “for cause” at the risk of a lawsuit.

This open secret is one reason employers have long preferred to hire someone employed at another company rather than someone who is unemployed.  

(2) Employers think other companies let go of underperformers first and hold on to top performers.  The thinking is that, when XYZ Company lets 10% of its workforce go, it probably is mostly letting go of its 10% least desirable employees.  

(3) Lastly, companies feel that people who are out of the workforce for extended periods of time, such as two or three years, may lose some of their work-related skills.

Are these beliefs always correct?  No, though they surely are at least partly accurate some of the time.  In a normal job market, these biases against the unemployed are not a big deal.  Does every employer feel this way?  Undoubtedly no. 

Unemployment surely is always a disadvantage, but America has traditionally had enough jobs to go round so that most any able-bodied unemployed person would, sooner or later, find something.    In today’s bad job market, the already existent bias against the unemployed is a bigger issue for the unemployed because there are so few jobs available. 

There are other small biases that exist in hiring: in favor of the tall, in favor of the attractive and in favor of people with degrees from prestigious universities.  Studies have shown taller people earn more [2] and more attractive people earn more [3].  These facts add insult to injury to men because studies also show women prefer taller and wealthier men; attractiveness is universally desired in a mate.  But, I would not recommend a federal statute banning discrimination on account of height; how does one even begin to measure such discrimination in a real world situation?  Would it not open to the door to frivolous lawsuits?


What would happen if the President’s bill passes and the unemployed are allowed to sue employers for discrimination?  Would the long-term unemployed now quickly find jobs?   I think the answer is no

Let’s think ahead and assume President Obama’s bill becomes law.  It is not clear that employers who are predisposed against the unemployed would be any more likely to actually hire the unemployed.  There are myriad reasons an employer can give (“doesn’t fit our culture”) for passing over an applicant.

But, the new law would make it far more risky to interview the unemployed.  Any unemployed person who applies for a job but is not hired would have legal standing to try to file a lawsuit against the employer.  The safest bet for an employer hoping to avoid these lawsuits would be to try not to interview the unemployed in the first place.  How might they do that?  Obvious options would be to employ recruiters who cold call people already employed elsewhere, look to internal (already employed) candidates, outsource to another country, or automate rather than hire anyone at all.

I know this is cold comfort to the long-term unemployed, but the idea of forcing employers to hire the long-term unemployed through lawsuits will backfire and make it even tougher for the unemployed to get interviewed and may result in fewer new jobs.  A much better idea to actually accomplish that goal would   be a carrot, rather than the stick:  a tax credit for hiring the long-term unemployed.

Unfortunately, this is another example of President Obama- who has no experience whatsoever in private business – proposing something that would actually be counterproductive.   The continuous flow of proposed high taxes, new regulations and laws such as this one creating a new protected discrimination class of unemployed people are exactly what is making American business skittish to hire at all.  The private sector creates jobs, not the government through new laws allowing for more lawsuits.

As always, comments are welcome.




Pictures from Wikipedia Commons.

Long-Term Downgrade for a Short-Term “Problem”?

In Debt Ceiling, Economy, Federal Deficit, Standard & Poor's USA Downgrade on August 9, 2011 at 11:56 pm

Eugene Robinson happens to be one of my favorite liberal columnists because he writes with flair and tends to be ideologically consistent.  Whereas many writers are predictably partisan hacks, Mr. Robinson is willing to take on President Obama and the Democrat Party when he believes they are wrong. 

I take exception, however, with two points in today’s column. [1]   

Mr. Robinson says the downgrade has Republican “footprints” because he thinks S&P is afraid the GOP will force a default.  He says, “This isn’t the rationale that S&P gave, but it’s the only one that makes sense”.  Many on the Left are trying to blame the downgrade not on the party in power but on Republicans (see:  Never mind S&P’s own words about the growing debt or their repeated warnings in recent years, warnings issued before there even was a Tea Party (see

If Mr. Robinson believes S&P based – or should have based – its decision not on the growing US debt but on a near-term Republican “threat” to default, then why downgrade the long-term debt to “AA+” and keep the short-term debt at “AAA”?  Isn’t it the shorter term debt supposedly at risk of Eric Cantor?  Why worry about the 30 year T-bond and not the one year T-bill?  Mr. Robinson quotes S&P, “A new political consensus might (or might not) emerge after the 2012 elections.”  True; so why worry more about who will be in Congress 20 or 30 years from now?  

We do not know how fast the deficit will grow; we might bump up against the Debt Ceiling faster than expected, possibly before the 2012 elections if the economy dips into another recession.  Many financial commentators are predicting a new recession. [2] [3]   S&P specifically says, “we believe [the Debt Ceiling] act provides sufficient clarity to allow us to evaluate the likely course of US fiscal policy for the next few years.” [4]   The short-term “AAA” rating was affirmed even with John Boehner on the loose in the Capitol?  Wow.

Secondly, Mr. Robinson disputes the merit of any downgrade, saying:

“There is no plausible scenario under which the United States would be unable to service its debt. If political gridlock were to persist, our government would be able to pay bondholders with a combination of tax revenues and funds raised by selling more Treasury bills. And in the final analysis, as Alan Greenspan noted Sunday on “Meet the Press,” the United States “can pay any debt it has because we can always print money to do that.” [1]

Yes, it is true the US can pay bonds out of current tax receipts or just “print money”. [5]  But there is a massive risk to printing money.  Firing up the government printing press debases the currency a la Weimar Germany.  

Running the printing press would be a short-term solution.  US government debt is a series of hundreds of outstanding debt issues.  Approximately every week, a series of Treasury debt matures and needs to be replaced with a new issue.  Treasury bills mature in less than one year. [6]  As of 7/31/11, the public held $1.5 Trillion of T-bills. [7]  All mature in the next 12 months and needs to be rolled over into new Treasury debts.  Other, older series of Treasury notes and long-term Treasury bonds mature regularly throughout each year, too.  For example, 30 year Treasury bonds issued in fall 1981 mature in coming months. 

If the US government decided to inflate away debt obligations by printing money, the US Dollar would decline in value.   That would lose investor confidence.  This would precipitate a crisis:  investors would soon enough refuse to buy new issues of Treasury debt at anything like current low rates, if at all.  Imagine yourself as China, lending to the US in the expectation of receiving US Dollars for your debt upon maturity.  If your interest and principal started being paid with rapidly depreciating Dollars created out of thin air, would you want to keep lending?  You’d demand higher interest rates, if you lent at all.  Alternatively, you might be willing to lend, but only in bonds denominated in Chinese Yuan.  You know the US government cannot inflate the Yuan, because the US printing press cannot print Yuan.  Amusing as it would be, I cannot picture Timothy Geithner changing out the US Mint’s printing blocks with Chinese characters.

Running the printing press is not a feasible bond payment option. 





[5] Note that Mr. Robinson is actually stating one reason a “default” was unlikely no matter what happened in the recent Debt Ceiling controversy:  the government could have paid bond interest first out of tax revenues.  

[6] T-bills mature in less than one year.  Notes mature in 1-10 years and T-bonds mature in more than 10 years.


Picture from Wikipedia commons.

When $3.5 Trillion was $3.5 Billion!

In Economy, Federal Deficit, Government Spending on August 6, 2011 at 12:48 am

In Fiscal 2009, the US government spent $3.52 Trillion [1].

In Fiscal 1926, the US government spent $3.58 Billion ($43 Billion in 2009 Constant Dollars). [2] 

If a picture can be worth a thousand words, perhaps there is insight available when looking at page 317 of the 1947 Statistical Abstract of the United States (pictured below). 

Note federal spending actually contracted in the Roaring Twenties, even as the economy boomed.   We tamed the severe Depression of 1920-1 not with massive deficit spending stimulus but with spending cuts. [3]

Even FDR’s 1930s federal government lived in penury compared to today.   In 1940, last year before our entry to WWII, the United States spent merely $9.1 billion ($140 billion in 2009 Constant Dollars).

I am not implying we do not get some value for the additional trillions we spend each year today, but the questions are: (1) are we getting good value for the money and (2) can we afford it?  Tonight, S&P’s ratings downgrade suggests the answer to #2 is no.

Statistical Abstract of the United States, 1947, pg. 316


[2] A useful Constant Dollar Calculator can be found, using your tax dollars by the way, at:


Death By A Thousand Increases: S&P Lowers USA to AA+

In Economy, Federal Deficit on August 5, 2011 at 11:45 pm

No American can be pleased with tonight’s announcement Standard & Poor’s is lowering America’s credit rating, for the first time ever, from the gold standard “AAA” to “AA+”.  I refer readers back to my July 28 post on why an S&P downgrade has been looming for years:  There is no joy in being proven right.

We Americans see ourselves as a “shining city on a hill”.  We developed a continent and built an economic empire.  America quite literally saved Europe from itself in WWI and we saved the world in WWII.  American economic might powered our own military and supplied our Allies in Britain, China, the Soviet Union and de Gaulle’s Free French.  The United States bankrolled international organizations like the IMF and World Bank.  Wall Street was the center of world finance.  Hollywood was the center of entertainment.  America’s corporations ruled many industries.  So many people loved the very idea of America they crossed oceans and deserts to immigrate here.  The USA’s economic wherewithal made possible large garrisons in Europe, Japan, Korea and elsewhere to initiate Pax Americana and win the Cold War. 

This downgrade is a hit to our very self-image of America as #1.  Canada is now more highly rated than the USA.  Sure, the Canadians are really nice people, play great hockey, and provided us with cool rock bands like Rush and Night Ranger, but it is an affront to our American psyche to think of Canadians being a better credit risk.

How will the nation respond?  Will we waste our time name-calling and angling for partisan advantage?  Will Republicans only blame Obama and will Democrats only blame G.W. Bush?  Even a cursory look at the Public Debt graphs below shows the deficit grew in fits and starts since WWI, but exploded the past 12 years through two recessions and under Presidents and Congresses of each party.  I assure you arguing about Bush vs. Obama will not get us back to an “AAA” rating.

People will disagree about whether taxes should go up or spending should go down.  When asked if you support a program: ask yourself if you would personally pay more taxes for it?  In some cases, I would give an unequivocal “yes”.  In many others, it is not worth it.  The problem is how we too often have said “yes, I like high-speed rail and I like the idea so much I would be willing to spend $500 billion of SOMEONE ELSE’S MONEY for it.” 

How did we get here? 

This downgrade to AA- has been death by a thousand increases.   It is the result of literally thousands of programs – big and small – mostly well-intentioned… but not fully funded.  It seems many Americans perhaps took our nation’s greatness a bit too much to heart.  We let our seemingly ever-increasing prosperity allow us to be overly optimistic about paying for today’s bills.  We could pay it tomorrow because things always get better in America!  Or perhaps we weren’t really paying attention and our politicians skipped the tough choices and punted the costs to the future. 

America looked to Europe and copied many European social programs.  But we did not copy European levels of taxation.  We wanted to have our welfare state and eat it, too.  We spent for a War on Drugs.  We subsidized our farmers, exporters and college students and all manner of other things, some useful, some not so much.  We dipped deeply into the public till for generous mortgage interest deductions.  Some of us probably borrowed more than we otherwise would – and more than we knew we should – because Uncle Sam sent us a bigger tax refund check each spring if we borrowed more.  Besides, homes always go up in value, right?

We borrowed to cover our wars.  WWI and WWII were extremely expensive in terms of GDP.  Korea, Vietnam, Cold War, Gulf War, Iraq, Afghanistan and many lesser military adventures like Grenada, Lebanon, Panama, Kosovo, Libya all have been costly.   Military strength meant fiscal weakness.

Looking at the $14.3 Trillion Public Debt is seeing only part of the problem.  A sobering look is provided by considering the “off the books” debt.  As discussed by bond investor Bill Gross of PIMCO, the present value of the future liabilities of the United States is a staggering $66 trillion. [1]   Divide $66 trillion by 308 million Americans and the per capita share is a sobering $214,300 per person.  Think about that!  If you have a family of four, your family’s share of the Public Debt is about $186,000 but your share of future Medicare, Medicaid and Social Security is $857,000.  That is over a million dollars per family.  We have made promises – which should be kept – to elderly Americans.  Paying for these promises is tough now and will not get any easier as more Baby Boomers retire.

It is up to you: do you want to cut spending or do you want to pay more in taxes?  Or both?  Whatever we decide, we have to decide on something.  We need big, serious changes.  We need to get our spending under control or S&P will someday lower us again… to “AA”, “AA-” and so forth.

The full text of S&P’s downgrade is available here:


Stimulus Recipient Among Illinois Mass Layoff Notices… Indiana Welcomes Another Illinois Company

In American Recovery & Reinvestment Act (Stimulus), Economy, Illinois, Indiana, Job Creation on August 3, 2011 at 9:32 pm

Today’s Yahoo News story “Ominous signs of surging layoffs in Illinois, nation” [1] reports mass layoff notices.  Let’ see why these layoffs are happening.  An AP story explains why A-1 Wire was closing its Rockford, Illinois operation, laying off 51 employees:

“ELKHART, Ind. — The Indiana Economic Development Corp. says a producer of high-performance engineering alloys is moving its operations from Illinois to Indiana, creating up to 100 new jobs by 2014.  THE IEDC said Saturday that Special Metals Corp. will move its A-1 Wire division from Rockford, Ill., to a 50,000-square-foot plant in Elkhart starting in September.” [2]

The State of Indiana is one of many that has targeted Illinois companies for relocation after Illinois raised its personal and corporate income tax rates in January 2011. 

On-Cor Frozen Foods is moving 85 jobs out of Illinois [3].  This is interesting because last fall, On-Cor was the beneficiary of Stimulus tax-exempt financing to open a new facility in the Chicago suburb of Geneva. [4]  As reported 11/6/10 in the local newspaper:

“GENEVA – Kane County officials are getting ready to issue $10.25 million in recovery zone bonds to facilitate On-Cor Frozen Foods’ relocation to Geneva.  Under the American Recovery and Reinvestment Act of 2009 the county can issue up to $41 million in bonds to stimulate the economy through low-cost, tax-exempt financing.  The proposed bonds are intended to help companies with financing for buying or improving property or for buying equipment. The bonds do not create an obligation for the county or the taxpayers, but will be paid back by On-Cor, officials said.  Sherry DeMeulenaere, treasurer for a limited liability corporation that owns most of On-Cor, said the bonds will pay for equipment used to process frozen foods… “We have an existing workforce in Chicago and jobs will depend on how many will come out to Geneva.  We have 85 jobs downtown and we expect to create another 46.” [4]

So much for the job creation in Illinois.  46 minus 85 is a negative number.  Might those “46 jobs” at the new Geneva facility be among Stimulus jobs the Administration’s website counts as created? 

“Furniture maker Clarin is closing in Lake Bluff, telling the state that it’s letting 75 workers go due to the sale of its assets. ” [5]  This site is Clarin’s corporate office and manufacturing plant.  Ironically, Clarin’s website is proud President Hebert Hoover sat in a Clarin chair.  [6] [7]  Clarin survived the Great Depression but not the Great Recession.

President Herbert Hoover sitting on a Clarin chair

Atlanta-based Consolidated Container is a good-sized operation with 65 facilities; I could find no word on why they’re closing in suburban Chicago. [8]

Pacific Coast Feather is a large company from Seattle, WA.  No word on why it is closing a facility in Des Plaines, Illinois. [9]
Schofield Media Group LLC in downtown Chicago is closing, affecting 107 employees.  Schofield was a $25 million revenue company and is closing operations after “unexpectedly” losing its bank financing. [10] 

The Chicago Sun-Times “will eliminate 456 jobs in Chicago starting in late September through year-end. Most of the jobs are unionized and include electrical workers, machinists, mailers, operating engineers, pressmen, paper handlers and Teamsters who serviced the soon-to-close plant at 2800 S. Ashland Ave.” [5]

Some of these closings are not surprising; Borders is closing everywhere.  Retail operations like Shopko, restaurants or garden centers may close due to competitive stresses or because of weakness with local consumers.  A weak economy may reflect high local unemployment, which might be expected when companies like A-1 Wire, Pacific Coast Feather, On-Cor Foods, Clarin Seating and Schofield Media close or leave.  The Illinois economy is not working very well and Illinois does itself no favors with an unattractive tax and regulatory environment.








[7] The picture of Herbert Hoover in a Clarin chair is from Yahoo! Images…&p=clarin+herbert+hoover&oid=8e622c509a44a00989da692e63fb24cd&fr2=&no=1&tt=4&sigr=116rkq78b&sigi=11u46dl55&sigb=12q1bl78i&.crumb=hHoSiPH8Zmf




US “AAA” Credit Rating Downgrade Was Expected

In Debt Ceiling, Economy, Federal Deficit on July 28, 2011 at 4:32 am

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We cannot say we were not forewarned about a possible drop in the S&P rating for sovereign debt of the United States from the gold standard of “AAA”.   Back in April 2011, S&P cut its outlook on US debt from “stable” to “negative” on account of the mounting deficit.

I think the current political battle over raising the Debt Ceiling will end with an eleventh hour deal but the Federal Government’s credit rating may be cut, anyway, even with a deal that avoids a default.  Mr. Deven Sharma, president of Standard & Poor’s, told a US House subcommittee the US would need to work out a deficit reduction package of about $4 trillion over the next decade for the nation to keep its “AAA” rating. [1]  The Boehner and Reid deals now on the table fall well short of $4 trillion and President Obama’s original request was for a Debt Ceiling increase with no deficit reduction at all.

If the rating is dropped from “AAA”, there will be much partisan blame over who caused it.  The good news is a drop to “AA+” is hardly a high risk rating, putting the USA at the same rating as Belgium.  There will be short-term portfolio churn as some pensions and money market funds require holdings to be “AAA”.  Other buyers are likely to step up for US debt, though probably at slightly higher yields.  Nevertheless, the blow to American prestige will be enormous. 

Do not blame the ratings agencies who are simply messengers of the bad news.  The fact is a ratings downgrade becomes inevitable when servicing the debt becomes more risky.

Do not let politicians mislead you into thinking a ratings downgrade unexpectedly popped up out of nowhere.  We have been warned many times the past three years as seen in this sample of headlines:

“S&P says pressure building on U.S. “AAA” rating,” Reuters, Sept. 17, 2008 [2]

“Moody’s Says U.S. Debt Could Test Triple-A Rating”, New York Times, March 16, 2010 [3]

“Moody’s and S&P Alert US About Credit Rating”, New York Times, January 14, 2011 [4]

“U.S. Warned on Debt Load: S&P Signals Top Credit Rating Is In Danger, Stoking Political Battle on Deficit”, Wall Street Journal, April 17, 2011 [5]

“Analysis – United States gets closer to losing its AAA rating”, Reuters, July 25, 2011 [6]

May we be forewarned about what may happen in the future.  There are many notches below “AA+” a profligate United States may gradually be cut to.  Most ominous is how continuous growth in the deficit relative to GDP exposes the US to higher interest rates whenever the rate environment turns up.  The deficit then grows as the debt used to pay that interest is added onto old debt.  A 3% increase in average interest costs on a $15 trillion debt amounts to $0.45 trillion in new interest expense each year.  Most 30-year bonds will not adjust any time soon, but short-term T-bills roll over every month, reseting to the latest interest rates.  





[4] which refers to Moody’s report: