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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:

An 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.

A shouting 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:

The 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 | TrackBack


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?

Posted by: Carol at January 10, 2004 10:20 AM | PERMALINK

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.

Posted by: howard at January 10, 2004 10:30 AM | PERMALINK

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?

Posted by: Kryptik at January 10, 2004 10:38 AM | PERMALINK

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 employed now?

Posted by: bobbyp at January 10, 2004 10:40 AM | PERMALINK

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.)

Posted by: Karmakain at January 10, 2004 10:41 AM | PERMALINK

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.

Posted by: Mike at January 10, 2004 10:41 AM | PERMALINK

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.

Posted by: Old Hat at January 10, 2004 10:54 AM | PERMALINK

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.

Posted by: James E. Powell at January 10, 2004 11:04 AM | PERMALINK

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.

Posted by: peter jung at January 10, 2004 11:05 AM | PERMALINK

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.

Posted by: Tony Shifflett at January 10, 2004 11:05 AM | PERMALINK

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.

Posted by: Zizka at January 10, 2004 11:16 AM | PERMALINK

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.)

Posted by: howard at January 10, 2004 11:25 AM | PERMALINK

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.

Posted by: Bartolo at January 10, 2004 11:26 AM | PERMALINK

I am not an economist but isn't this fairly similar to the events of the late 20s?

Posted by: Leo at January 10, 2004 11:27 AM | PERMALINK

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.

Posted by: M. at January 10, 2004 11:27 AM | PERMALINK

"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

Posted by: fuppeduck at January 10, 2004 11:39 AM | PERMALINK

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.

Posted by: ____league at January 10, 2004 11:59 AM | PERMALINK

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 years.

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 assessment.

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.

Posted by: marquer at January 10, 2004 12:01 PM | PERMALINK

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.

Posted by: ____league at January 10, 2004 12:02 PM | PERMALINK

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.

Posted by: Andrew | BYTE BACK at January 10, 2004 12:10 PM | PERMALINK

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?!

Posted by: grizzly at January 10, 2004 12:16 PM | PERMALINK

marquer writes:

...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)?

Posted by: -pea- at January 10, 2004 12:19 PM | PERMALINK

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.

Posted by: Linkmeister at January 10, 2004 12:22 PM | PERMALINK

"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.

Posted by: DanM at January 10, 2004 12:35 PM | PERMALINK

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 low.

Posted by: Pol at January 10, 2004 01:04 PM | PERMALINK

I agree, we really do need to get rid of Paul Krugman.


Posted by: Darwin at January 10, 2004 01:36 PM | PERMALINK

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]

Posted by: WillieStyle at January 10, 2004 01:58 PM | PERMALINK

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.

Thank you.

Posted by: Andrew | BYTE BACK at January 10, 2004 02:10 PM | PERMALINK

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

Posted by: Mark S. at January 10, 2004 02:34 PM | PERMALINK

"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.

Got it?

Posted by: Hank Essay at January 10, 2004 02:39 PM | PERMALINK

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 government.

Posted by: Matt Young at January 10, 2004 03:29 PM | PERMALINK

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.

Posted by: Mimikatz at January 10, 2004 03:50 PM | PERMALINK

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?

Posted by: marty at January 10, 2004 04:39 PM | PERMALINK

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!

Posted by: marquer at January 10, 2004 05:38 PM | PERMALINK

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.

Posted by: Harrow at January 10, 2004 07:38 PM | PERMALINK

I wonder if the word "Jobs" was repeated more times on that background than there were new actual jobs.

Posted by: praktike at January 10, 2004 09:24 PM | PERMALINK

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.

Posted by: Another Bruce at January 11, 2004 12:48 AM | PERMALINK

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 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 drags on.

May God(dess) have mercy upon us all.

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