January 10, 2004
ECONOMIC DOLDRUMS....A few days ago Paul Krugman wrote a column in which he suggested that there was "something funny" about recent unemployment data:
unusually large number of people have given up looking for work, so
they are no longer counted as unemployed, and many of those who say they
have jobs seem to be only marginally employed. Such measures as the
length of time it takes laid-off workers to get new jobs continue to
indicate the worst job market in 20 years.
match ensued between Brad DeLong and Dan Drezner over whether Krugman
was really interpreting the statistics correctly, but regardless of the
specific placement of Krugman's qualifiers, yesterday's job news seems to be on Krugman's side:
unemployment rate did dip two-tenths of a point to a 14-month low of
5.7%, but that was because more than 300,000 people dropped out of the
labor force — a sign not of economic strength but of an exodus of
discouraged job seekers.
There is something funny about the economy these days, because despite big GDP growth numbers and falling unemployment we're not seeing rising employment, rising incomes, or rises in factory orders.
What's more, even the IMF is worried about our budget deficits, the
dollar is sliding, and George Bush wants to distract everyone by sending
us to Mars.
This isn't the Great Depression, but it's not exactly good times
either. There really is something disturbing about this economic
"recovery," and it's not something that can be solved with yet another
round of tax cuts predicated on wildly phony projections of job growth. Unfortunately, that seems to be the only tool George Bush is willing to consider using.
We really need to get rid of this guy.
Posted by Kevin Drum at January 10, 2004 10:11 AM
When even his former (extremely conservative) Secretary of Treasury
says Bush is out of touch (isn't that what it all boils down to?) you
have to believe Bush is out there somewhere in lala land.
I suppose he makes a perfect puppet for the right people, which is why those people are so intent on getting him re-elected.
I wonder if anyone will say "It's the economy, stupid" to Bush this go round?
George Bush, bequeathed by Clinton (and Rubin)(and Dems who voted for
tax increases) (and GOP congresspeople who advocated spending
restraint) a strong fiscal position, has, with the assistance of the
irresponsible GOP congress, eviscerated that strength. It will take a
very long time to undo the damage, which has barely begun to become
apparent; frankly, were Asian bankers not willing to support the dollar
as an export strategy, we'd be seeing much worse conditions now, and we
will yet (me? i expect stagflation).
We have seen this show before - it was called LBJ and Guns and Butter - only this time, as Marx tells us, it returns as farce.
Meanwhile, the structural changes that are occurring in the economy -
increasingly relentless competition spurred by freer trade and the
internet resulting in relentless cost-cutting and wage-squeezing - are
continuing on, and bush ignores them.
So we have structural fiscal problems and structural economic changes
working together to create this odd recovery, and bush without a clue
what to do about it.
And the sad thing is that somehow, someway, all the blame for this
will somehow be deflected masterfully and placed on those evil, nasty
liberals. Krugman's obviously partially responsible too, since he's so
pessimistic, the economy can't help but shrink under his baleful glare.
Anyone remember a time when this was crazy talk, not actual strategy/talking points?
In response to an ad in the paper, I sent $25 to somebody claiming I
could make good money stuffing envelopes at home. Does this mean I'm
Howard is right, well, at least half right. I'm not sure how much the government can really do to fix this, to be honest.
However, it's becoming increasingly clear that through the decision
of various business managers, that structural unemployment has gone up.
It's becoming more of a service economy. And even that is severely
threatened by the increasing loads of consumer debt.
Maybe it's not a depression, but it's a serious crash waiting to
happen, unless some serious steps are taken. (I suggest a large increase
in the minimum wage to get more money flowing around the lower classes,
meaning more services used.)
Bush had a big sign behind him yesterday saying "Jobs!".
Has Rove stumbled once again with his signage?
If I were Bush's Brain, I don't think it's a policy area I'd spotlight.
When even the tories at the IMF says the US economy is unstable, I get worried.
BTW, I hope you're kidding about responding to the ad for stuffing envelopes, BobbyP. Those are pyramid schemes, you know.
Unless and until a significant portion of the press/media starts
telling the facts instead of promoting the Bush administration, the
American public will continue to believe in and support Bush's bold
leadership and steely resolve. The emperor has no clothes, true, but
nudity is rife throughout the press corps.
I wonder if there aren't some Republicans out there starting to
wonder about the sustainability of the Bush agenda? The GOP waged a
focused, 30- year campaign to put themselves in the driver's seat; they
scratched and clawed and cheated their way to a position of national
political strength, and for what? To run up $500 billion deficts, and
wage pre-emptive wars, and trash the environment?
The conservatives ought to be as pissed off as any liberal.
What can we expect? The President is incapable of engaging himself to come up with some real economic policies.
The Financial Times this past week had a good editorial about how Bush will have to raise taxes if reelected.
The intelligent conservative is either a mythical beast, or extinct.
Nothing Bush can do is too stupid to make the people who call
themselves conservatives jump ship. They'll mumble around a little and
then go vote for his re-election.
zizka, i think they're becoming extinct, but there are still a
handful of honest conservatives hanging out at Cato and elsewhere.
Sadly, though, most of them have convinced themselves that no matter how
awful george bush is, some mythical democrat would be worse, and have
lost their minds (and their integrity) as a result.
Karmakain, because I wrote my first post when I was still waking up, i
could have been clearer - yes, we agree that there are externalities
that are not easy for government actions to solve.
Still, i think the first step is to get the fiscal house back in
order, which means passing something along the lines of the clark or
lieberman tax packages and second, saying no to outrageous spending
proposals (moon mission, farm subsidies, rogue state missile defense,
and, frankly, medicare drug subsidies). Then we can move on to policies
that might ameliorate some of the emerging structural conditions.
(Sadly, of course, Bush could have offered a real stimulus package,
which would have softened some of the job affects of the structural
factors, but instead, he produced his typical bush league economics, and
now it's too late, due to the fiscal breakdown he's presided over.)
Why not eliminate all taxes? Then we could
have a "cafeteria" plan, with citizens signing
up for the service they want. Many might not
want their airliners guided safely, their
workplaces made safe, their meat inspected
(Grover Norquist inspects his own), and so on.
I am not an economist but isn't this fairly similar to the events of the late 20s?
To paraphrase Rush, it's all about getting and keeping power. I'm a
moderate by inclination, although I admittedly lean left. But I'm mostly
a pragmatist. I could be reasonably happy with conservatives in power
if they kept what I regard as their worst impulses
(anti-environmentalism, anti-abortionisn and creationism) somewhat under
control and if I felt they were competent.
Let me add that I felt that both Dole and McCain were at least
reasonably competent. If either of those two had been elected in 2000, I
think this country would be in considerably better shape.
"Republicans used to believe in fiscal responsibility,
limited international entanglements and limited
government. We have come loose from our moorings.
Sen. Charles Hagel (R-Neb.), LA Times, 11/30/03
Unfortunately Republicans like Hagel have not yet become realized
that they need to start voting against some of the dumber ideas.
Nothing will change as long as they go along with it.
And while the jobs haven't been there (and the quality of those jobs
has been far below those added during the '90s expansion), the equities
markets were remarkably bubbly up until Friday.
What gives me pause is that we may well have an equities crash waiting in the wings as well.
The last time that a bunch of self-proclaimed financial geniuses
decided that the cure for faltering US manufacturing competitiveness was
a deliberate policy of weakening the dollar, it was during the Reagan
Jim Baker found out back then that the markets take even the offhand
musings of U.S. Secretaries of the Treasury pretty darn seriously. After
the Plaza Accords in 1986, which had been intended to bring the
greenback down just a bit, Uncle Buck promptly fell out of bed.
The dollar proceeded to lose nearly fifty percent against the
currencies of the U.S.'s major trading partners of the day. Once
international currency speculators get the bit in their teeth, they will
ride a move for all it's worth.
The equities markets regarded this drop as positively tonic, right up
until it became clear that a radically weaker dollar was going to cause
foreign holders of American debt to demand higher interest rates to
compensate for the currency differential. The obvious corollary was that
those higher interest rates were going to put the hurt on Stateside
domestic consumption and growth.
The Dow Jones proceeded to lose one-third of its value in a single week in late October of 1987.
Back in 1997, there were some retrospectives on Black Monday, the
majority of which contained the usual puffery about how There Had Once
Been Problems But They All Have Been Fixed, You May Go About Your
Business Without Fear, Citizens.
Balderdash. It was just *one* year later that the collapse of LTCM
nearly took down the entire *global* financial system, not just that of
the United States.
Yeah, there are "circuit breakers" on the exchanges now, yeah, the
technology of order handling is a lot better, and no, it won't do much
if any good in a real panic. Never does. The best that the circuit
breakers could do would be to slow the rate at which the collapse
happens -- akin to what happened to cattle futures two weeks ago when
the BSE news hit, i.e., locked limit-down day after day after day.
The other big difference between 1987 and today is the enormous stack
of volatile and illiquid derivatives which the largest US financial
players are harboring. Look at the derivatives exposure of a firm like
JP Morgan and if you know what's what, it ought to make you shudder.
Buffett thinks we may see an epochal derivatives meltdown, a
Chernobyl of counterparty risk, at some point. I agree entirely with his
It would be only poetic justice if this were to happen on Dubya's
watch. However, America's high-finance caste has been prospering
mightily under this administration, and I expect a massive
Potemkin-village effort to dress up the economic stats for the remainder
of the campaign year. That should forestall any wipeout for now.
Which means that, assuming an upset victory and an incoming
Democratic president in 2005, there is a chance that one of the first
things said new POTUS will have to contend with is another Black Monday.
That could get ugly. Hard enough to get a legislative agenda through
when it's smooth sailing economically.
I've called that the "poisoned chalice of victory" scenario. And the
only real consolation here is that if Bush pulls it out and wins
re-election, the whole mess will be his instead.
Might be time to read "The Iron Heel" by Jack London. It is
available for free several places on the web because he died long enough
ago that it got into the public domain before Disney etc. pushed
through the latest copyright for ever act.
I just posted at my site about now being a really good time for
liberals and all those who don't want Bush elected to calmly and
rationally push home good information and solid links at their own sites
about Bush-sponsered talking points, laws and ideas that truly are
damaging to the vast majority of this country's citizens.
It's better than being idiotic and saying "I told you so" which in the end rarely wins anyone over.
After reading Sen. Hagel's comments on the current sad state of the
Republican party (used to be the party of limited government, fiscal
responsibility, limited international entanglements, etc.) I think he
should switch parties, and promote himself to Dean as the ideal Veep
choice. Can you imagine the credibility he would immediately have
tearing Bush apart in all those red states, after saying how he had to
switch in order to save the Republic?!
...and I expect a massive Potemkin-village effort to dress up the
economic stats for the remainder of the campaign year. That should
forestall any wipeout for now.
Would this include hiring employees just to win an election (with the intent of layoffs after the victory)?
Regarding marquer's comment that the high-finance crowd has done well
with Bush, on Moyer's NOW program last evening I learned that in 2000
none of the big Wall Street firms were in the top ten list of Bush
contributors; this year six of the top ten contributors are.
"There is something funny about the economy these days, because
despite big GDP growth numbers and falling unemployment we're not seeing
rising employment, rising incomes, or rises in factory orders."
My interpretations --
big GDP growth: Having a lack of jobs and the salaries that come with
them, Americans are going into personal debt (refinancing their homes,
maxing out credit cards) to sustain their consumption. An average of
$19K personal debt per family at this point, an all-time high. Personal
bankruptcies are also at an all-time high.
Lack of employment: increased productivity of existing workers means
companies don't need to hire more people. Employment stays low.
Lack of rising incomes: since companies don't need to hire more
people, demand for workers is low and salaries stay low. Employers are
free to keep the increased profits for themselves, and the rich get
richer. That's why luxury goods sold so well over the holidays.
Lack of factory orders: We've outsourced our factory work to other
countries, especially via NAFTA. At this point, an increase in
consumption of US goods does not equal an increase in factory orders for
facilities in the US.
DanM, I think the increase in productivity comes primarily from
American companies outsourcing jobs to workers in other countries,
therefore keeping labor costs low, and the rehiring of American workers
I agree, we really do need to get rid of Paul Krugman.
I agree, we really do need to get rid of Paul Krugman.
Yes, he's too close to the truth.
[Cue X-files theme music]
Just a general comment.
Kevin Drum is on fire this last couple of days. Big issues of the day
explored. From building unions to WMDs - a question that lingers
because not nearly enough of the answers satisfy anyone. Comment-ators
have been substantative as well.
By the time I get here, usually, most of the good points (on both sides but mostly on "my" side) have been made.
The only place where I would disagree with Krugman and DeLong is that there is something new or unusual about all this.
I believe it was Keynes who said that the only thing that people are more ignorant of than history is economic history.
The funny thing is that one doesn't have to go very far back in
history to know that credit and asset bubbles have long term
consequences. The Japanese are still struggling with the effects of
their bubble economy more than ten years later. They have had several
false recoveries along the way only to see their economy falter again.
The best place to read about the predictable effects of economic
bubbles is in the book by the great (and unfortunately recently
deceased) economic historian Charles Kindleberger: Manias, Panics, and Crashes: A History of Financial Crises. If we follow the typical pattern, the real estate market will be toast in 2004.
One can also go very far back in history and find the same problems that we face today. Who said the following and when:
The national budget must be balanced. The public debt must be
reduced; the arrogance of the authorities must be moderated and
controlled. Payments to foreign governments must be reduced, if the
nation doesn't want to go bankrupt.
A. Cicero, 55 BC
"Bush had a big sign behind him yesterday saying "Jobs!". Has Rove stumbled once again with his signage?..."
Remember, ChimpyRove has nothing to do with signage. It's all the
fault of entry-level aides when something such as this screw appears.
The main parts of the economy these days are underground labor, a
spending contest between big governmentists, and an immigration plan to
import 25 million Mexicans and 50 million Chinese, (to pay for it all).
As far as undergound labor, it has now infected the software industry
considerably with cash payments, most restaurants, alomost all
construction, and certainly agriculture.
Tax evasion has tripled from three years ago, in spite of tax cuts.
The economy has simply accepted that it can never pay for past, present and future government and is acting accordingly.
I think using a work force from Mexico, which is allowed to keep
their payroll taxes in personal accounts, will certainly help the
economy. But the best proposal for paying off the nearly $10 trillion
in debt we will have accumulated is the Chinese idea. Move Chinese
workers and factories over here, make it illegal for Americans to work
unless they partiot themselves to another country, and bingo! We have
created an economy that works and is not subject to paying 50% for
The "recovery" is all going to corporate profits. Just watch them as
companies report in the next three weeks. In the past companies shared
the benefits of a recovery with workers. Not this time. Companies
either are not hiring, preferring to do more with the same workers or
add machines, or they are hiring overseas, where wages are less. In any
case, they aren't hiring here, so incomes are stagnating. But if
consumers can't keep consuming, what happens to the economy? To me,
they are breaking the social contract that goes back to Henry Ford--pay
high enough wages so the workers can buy the cars. Now they pay less,
and workers either buy on credit or skip the purchase. I don't see how
the shell game can go on. Sooner or later the people going into debt to
finance their lifestyle will either lose their houses or declare
bankruptcy. If consumers quit spending, depression here we come.
Who says Bush doesn't have a clue? or a plan?
He already has committed to further tax cuts--and we know they will work. He plans on cutting the deficit in half in 5 years.
What's everyone worried about?
Would this include hiring employees just to win an election (with the intent of layoffs after the victory)?
Pea demonstrates acute perceptiveness.
JFK personally called steel executives to "jawbone" down rapidly
inflating steel prices. It is to be expected that Bush will personally
call various GOP Team Leader chief executives and ask them to kindly
*hire* a few people, damnit!
If we follow the typical pattern, the real estate market will be toast in 2004.
The Economist started warning a few months ago that the US (plus
Britain, Ireland, Australia, Spain and Holland) is developing a housing
market bubble. Britain and Australia have recently raised interest rates
in part because of concern for real estate inflation, but the Fed's 1%
is keeping the bubble growing. When it finally pops, it'll drag down the
economy more than the stock market implosion did, because the average
person has more invested in his/her house than in stocks.
Just wanted to share the good news with everyone.
I wonder if the word "Jobs" was repeated more times on that background than there were new actual jobs.
Does anyone besides me find these one word repetitive backgrounds
more than a little creepy and Orwellian. It's like they don't expect us
to process more than one idea at a time. And they may be right.
Excellent analysis, marquer, though I'd add that I'm anticipating not an economic Chernobyl, but an economic Hiroshima.
That they are right is true about far too many people, Another Bruce.
Homer Simpson is America and America is Homer Simpson. ("D'OH!")
Harrow: I read an interesting article at http://www.alternet.org
about how the prosperity of the previous decade was based on three
bubbles: The stock market bubble, the dollar bubble, and the housing
bubble. The stock market bubble went kerplooey a few years ago, even if
Bush's plutocratic tax giveaways are currently having a momentary tonic
effect. The dollar bubble is going the way of the dinosaur with our
currency being worth 80% of the euro. That leaves the housing market,
and if that goes . . . well, let's just say I am seriously considering
dumping all my stock and buying gold, and making sure said gold is
available to me in a safe-deposit box at my bank just down the street.
I'm not the dogmatic sort of ultra-lefty I was during my schoolboy
years, but I still wonder why the corporate fat-cats are trying so hard
to prove true Marx's prediciton that capitalism's demise will be the
eventual inability of the employed classes to afford the goods and
services that capitalism ends up overproducing even when the economy and
therefore demand is strong.
Though truth be told, the true undoing will be when world oil
production starts to peak. What that refers to is a little-known
geological fact that when a certain amount of petroleum is extracted
from an exploitable oil reserve, production from that reserve will
forever after continually decline until it is no longer economically
worthwhile to extract any more petroleum. The vast majority of
exploitable reserves have been discovered already, and at some point in
this decade or the next, production for the world as an averaged whole
will peak. The law of supply and demand will send prices up as the
world industrial economy has less and less energy available to it with
every passing year. Even though this process will be gradual at first,
modern capitalist economies, which depend on expansion in order to be
able to provide for people, are extremely prone to upsets. So even
having 10% less energy available after a five year period could very
well send even a healthy modern economy (not to mentioned an economy as
highly leveraged as ours!) into an unimaginable tail spin. And because
alternative energy solutions while somewhat viable will never be able to
entirely replace the limited supply of petroleum for our vast energy
demands, this problem will only get worse and worse as the new century
May God(dess) have mercy upon us all.
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