Saturday, May 12, 2007

Reaganomics Versus Bushonomics

When I was growing up in Southern California, I noticed early on that there were a lot of different kinds of Republicans but there were two kinds who caught my attention early on. The first kind to catch my attention were the right wingers, including in particular, the John Birchers. They were clearly the lunatic fringe in those days and yet forty years later they and their allies are now very much in power. The second kind of Republican that caught my attention were the hardnosed, pragmatic businessmen who knew their stuff. You had to watch out for the pragmatic Republican business people, though. If you asked them about things that had to do with their business or how they used money, they were very informative; if you asked them about things outside the main part of their experience and knowledge, they tended to pontificate almost as badly as the right wingers (my great uncle, who had been in the oil business, was a surprising exception, but he wasn't just an engineer, he had a remarkably deep understanding of people and his conservatism had little to do with what we see these days).

Generalizing about anyone is not usually a good thing to do. But understanding general trends can be useful. There's a qualitative difference between the Reagan Administration and the Bush Administration that's easily forgotten. Probably, through sheer dumb luck, or simply because the architects of the Reagan Administration wanted a certain percentage of credible people, the Reagan Administration had a mixture of right wingers and pragmatists. Every time the right wingers got in trouble, the pragmatists, people like James Baker or Howard Baker, would bail them out or force them out of office. It's not quite as clean cut as that, though. The economy of the 1980s was something of an illusion and not the result of Reagan's tax cuts. Incomes for workers were actually stagnant. If Reagan stimulated the economy, it was largely because of his huge and frankly reckless budget deficits, deficits that we spent the 90s paying for. But the thing that keeps getting forgotten as Republican presidential candidates wax nostalgic for the Reagan years is that the price of oil collapsed in the early 1980s. After the high oil prices of the 1970s, it was no surprise that low oil prices had a lot to do with the better economic conditions of the 1980s. And there was a reason why many Americans didn't feel the pinch in the 1980s: the growth of two-income families exploded in those years.

Bush has given us tax cuts and huge deficits, deficits largely driven by a flawed military policy in Iraq that is costing Americans hundreds of billions of dollar with nothing to show for it. Now I'm not an economist. I'm just someone with a long memory and an eye for details. I'm frankly amazed the economy has been doing as well as it has for the last six years despite a growing number of red flags that ought to have people thinking. Unlike the Clinton years, incomes for most Americans are again stagnant. Moreover, the contrast with the Reagan years is disturbing. Instead of low oil prices, the price of oil is definitely impacting our economy. Instead of yielding to the pragmatists in his party, Bush does his best to purge them from his administration while digging a deeper hole. Instead of identifying key areas where our economy needs focused attention and investment (like the computer industry during the Reagan years), Bush has been more concerned with rewarding sagging industries more interested in the status quo than any real innovation for America's future (well, if they're loyal Republicans that seems to be a disgusting factor as well). And Bush has signed into law too much Republican-sponsored legislation that makes life easier for business people who are corrupt.

I was no fan of Reagan's policies but Reagan and his advisers usually managed to keep things from really getting out of hand (though the Savings and Loan industry meltdown was obviously an exception). I don't have the feeling of reasonably competent management in the case with Bush and his advisers. Not even close. Katrina and Iraq have given us many examples of incompetence but even when it comes to the economy, many Americans, myself included, are getting the uneasy feeling no one is properly minding the store.

I've talked about how we seem to returning to the excesses of the Gilded Age and the robber barons who pretty much ruled the country. But there's another era we're beginning to resemble too much: the 1920s. The stock market recently had a string of advances that haven't been seen since 1927, two years before the stock crash of 1929. We clearly are returning to an era of imbalance. The wealthy are becoming very wealthy and the rest of America is falling behind, if not actually moving in the other direction. The real estate market is generally in trouble but not the market for second homes; only those who are well off can afford second homes and there's actually something of a boom in that market. But not in the general housing market.

Kevin Drum of the Washington Monthly has an excellent graph on how major stores have been doing in the last year and it's pretty much the same story. Sales for Pennys, Walmart, Target and Ross are down but high end stores like Saks are doing very well. This is a pattern that showed up in the 1920s as farm families were struggling while the upper middle class was spending like the boom would last forever. Kevin Drum, by the way, mentions that the cost of moorings in Orange County's Newport Harbor, a haven for the wealthy if there ever was, are rising sharply. Perhaps all those sales people who were making money on mortgages that many home owners can't afford managed to bail out before the mortgage business took a nose dive (one thinks of John Dean's phrase that became the title of his book, Conservatives without Conscience).

Here's more from Jared Berstein of TPM Cafe who points to a number of troublesome economic indicators and notes:
One might note that sales at high-end Saks bucked the trend and were up big in April, and I suppose you could wonder how far the frothy stock market or the spending of hedge fund managers will get you right now.

My guess is: not too far. That wealth is highly concentrated and if the vast majority of families are starting to feel as squeezed as I think they are, it’s hard for me to see where the economy’s stimulus is going to come from moving forward. That’s one reason I was disappointed to see the Federal Reserve not take notice of these recent developments in their last statement on interest rate policy.

I suspect we've been riding the crest of a phony economy for some time now. Things could start getting tough in very short order.

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