It's Still The Economy, Stupid

Friday, October 10, 2003  

Krugman hits another homer

Today's op-ed.

All this fuss about the rudeness of the Bush administration's critics is an attempt to preclude serious discussion of that administration's policies. For there is no way to be both honest and polite about what has happened in these past three years.

On the fiscal front, this administration has used deceptive accounting to ram through repeated long-run tax cuts in the face of mounting deficits. And it continues to push for more tax cuts, when even the most sober observers now talk starkly about the risk to our solvency. It's impolite to say that George W. Bush is the most fiscally irresponsible president in American history, but it would be dishonest to pretend otherwise.

On the foreign policy front, this administration hyped the threat from Iraq, ignoring warnings from military professionals that a prolonged postwar occupation would tie down much of our Army and undermine our military readiness. (Joseph Galloway, co-author of "We Were Soldiers Once . . . and Young," says that "we have perhaps the finest Army in history," but that "Donald H. Rumsfeld and his civilian aides have done just about everything they could to destroy that Army.") It's impolite to say that Mr. Bush has damaged our national security with his military adventurism, but it would be dishonest to pretend otherwise.

Still, some would say that criticism should focus only on Mr. Bush's policies, not on his person. But no administration in memory has made paeans to the president's character — his "honor and integrity" — so central to its political strategy. Nor has any previous administration been so determined to portray the president as a hero, going so far as to pose him in line with the heads on Mount Rushmore, or arrange that landing on the aircraft carrier. Surely, then, Mr. Bush's critics have the right to point out that the life story of the man inside the flight suit isn't particularly heroic — that he has never taken a risk or made a sacrifice for the sake of his country, and that his business career is a story of murky deals and insider privilege.

In the months after 9/11, a shocked nation wanted to believe the best of its leader, and Mr. Bush was treated with reverence. But he abused the trust placed in him, pushing a partisan agenda that has left the nation weakened and divided. Yes, I know that's a rude thing to say. But it's also the truth.

I don't hate George Bush. I have never met him, so I've no opinion of him as a person. I actually voted for his father in 1988. But what I expect out of a leader is leadership. Leadership is not words, ideas or visions. It is action; action in the interest of not the people who voted for you, but in the long-run interest of all people in the U.S. A true leader has an accurate assessment of the situation, and proposes an honest, straightforward solution to a problem that informs the people of his/her judgement. Leaders don't have to be right, but they have to incorporate the constructive criticism of their actions into an evolving policy response that above all is informative and honest. Whether in Iraq, on the economy, on the budget, on the environment, on whatever. Bush has failed this standard on all counts and in the worst possible way.

Whether its the political system that created them or vice versa, we are woefully short of leaders. I wasn't too happy with Clinton as a leader, either. When the opportunity came to reform the health care system in the early 1990s, Clinton formed a secret committee of his own supporters, developed a plan that didn't solve any of the underlying structural problems with the system, and then quickly abandoned the plan under criticism. Only a strong economy kept Clinton's administration from being just as much of a failure as Bush II, and it's highly probable that "accomplishments" such as "the end of welfare as we knew it" would have much less of a chance of passing in 2004 than in 1996.

Hopefully, we can get someone in office in 2004 that can show some genuine leadership, but I'm not too hopeful about that. Perhaps we will need something like a Great Depression to shake Americans out of their stupor. Herbert Hoover had all but abandoned the balanced budget plank of the Republican party by 1932. It simply wasn't realistic given the situation. He still lost and FDR was left to try to come up with a solution. Whether that was leadership outlined above is debatable, but at least it was a step in the right direction. I'll settle for the biggest step in the right direction.

posted by Teddy | 7:57 AM |

Tuesday, October 07, 2003  

What's that? A piston engine!

What did you buy that for? It was a bargain!

Turkey has voted to send troops to Iraq.

In exchange for $8.5 billion in aid, Turkey will send up to 10,000 troops...someday. Only $850,000 apiece! What a deal! (Who's the turkey now?)

posted by Teddy | 10:36 AM |

The Wall of Worry

It is often said that "Bull markets climb a wall of worry". This wall seems to be getting higher each day.

First, the money supply data. When interest rates first jumped higher in mid-June, I warned that it would have a contractionary effect on the money supply and the economy, because a lot of money is created by households when they refinance mortgages. The process is very similar to the way the Federal Reserve creates money. Households take out a long-term debt, a mortgage, in return for instant purchasing power. It doesn't matter whether the house is purchased from someone else (in which case the money goes to the former owner as capital gains), a refinancing where equity is extracted, or a home equity loan. In each case, debt increases in exchange for money supply. Once the money is created, it is spent and re-lent just as if the Federal Reserve had exchanged a long-term obligation (buying a Treasury bond) for instant purchasing power (reserves).

Seasonally adjusted, M2 money supply has risen just $12 billion, or 0.2% in the 10 weeks since July 7th. M3 money supply has actually fallen $13 billion, or about 0.15% over the same period. The unadjusted numbers are even worse, and as the seasonal pattern of money supply is not terribly stable I look at both. Interest rates bottomed out on June 16th, with the 10-year Treasury bond hitting a 50-year low intraday at 3.07%. The current 10-year rate is 4.22%. Rates have dropped a bit recently, but it seems to have had little effect on money supply growth.

Our economy is extremely dependent on credit growth to maintain economic growth. Since our current household savings rate is so low and we run large government and trade deficits, money for investment and lending must be provided either from abroad, or from future savings via borrowing. Broad money supply is a leading economic indicator since it quickly impacts the domestic component of lending growth - lenders need money as reserves to create money.

So it's not surprising that the monetary transmission mechanism is quickly showing up in monthly industrial production data: in factory orders, indexes of manufacturing output, or new layoff announcements.

Consumers seem to have quickly spent their way through the Bush tax cut, which showed up in their income immediately in the form of smaller payroll deductions. While economists have noted the jump in July and August consumption has led to a positive outlook for 3rd quarter GDP, chain store sales and auto sales seem to be slowing down rather abruptly as the effect of the tax cut ebbs.

This is setting up an economic showdown for the fourth quarter. If recent growth is sustainable, we have nothing to worry about. But as consumer incomes, employment and investment have yet to show consistent improvement, the sharp drop in money growth is ominous and portends another sharp slowdown in economic activity, one that would occur as consumers are already reeling from increasing joblessness, insurancelessness, poverty, foreclosures, and price hikes and state and local service cuts aplenty.

Defense spending thanks to Iraq gave us a 1.75% one-time boost to 2nd quarter GDP growth. Durable goods consumption gave us another 1.7% boost to that quarter and will probably do the same or greater in the 3rd quarter. With interest rates at 1% and the federal budget deficit nearing $600 billion, we're running out of these short-term goosings of GDP growth.

Another dip in growth prospects, a new round of layoffs, and more hikes in important prices are redoubling the existent feeling of desperation of Americans. It's certainly not doing much for consumer confidence. At this point, the Bush administration should be outlining programs to target middle and lower-class Americans to help them avoid the catastrophic effects of a continuing or renewed decline in economic activity. Instead, the focus of the Republicans in control of U.S. politics seems to be this and this and this, and this, and ignoring or downplaying this, this and all of this.

Do the Democrats really want to inherit this mess in 2004? Or would it be better for them to grow a spine and force Bush to shoot down these type of initiatives until Americans ship this whole bunch out of town?

posted by Teddy | 9:07 AM |