Saturday, July 28, 2007

Some Thoughts on the Bush Economy

I just happened to turn on CNBC near the end of the trading session yesterday to get a quick look at the stock market and oil prices. Oil had jumped by about two dollars a barrel. That surprised me—$77 a barrrel is not a good price if you're worried about gasoline prices and your winter heating bill. I was about to turn off the TV when I noticed the Dow Jones was jumping around, mostly in a negative direction. Then it improved for about thirty seconds. I started to reach for the remote and suddenly the Dow Jones dropped ten points. Then ten more. In the next twenty minutes, the Dow Jones dropped by over a hundred points to close down over 200 points for the day. That's after a drop of more than 300 points the day before. I couldn't help whistling.

I'm no economist and even economists have a hard time understanding, let alone predicting, the vagaries of the stock market. This last week may have been nothing more than a correction and it may be that things will be fine for the rest of the summer. Or the Dow Jones is signaling turbulence. It might go back up only to have several corrections in the next few months. And then.... Well, who knows. Like I said, I'm not an economist.

But there are things that concern me. The thing that concerns me the most is my own ignorance. If something bothers me, I tend to go searching for an answer. Here's the problem: I don't know for sure what's sustaining the American economy at the moment. When I go looking for the answer, I can't seem to find it. I notice that we're importing a great number of goods and when I look for what it is we sell in return, I get uneasy. Our number one export for years has been technology, particulary, military technology. Our number two export, which is not that far behind technology, is the much maligned entertainment industry. But these two aren't enough to overcome the trade deficit. Nevertheless, we're told by some economists not to worry about it. But, in the other direction, one of the things we import in truly awesome numbers is energy. In a world of high demand and diminishing energy reserves, that is a pattern that cannot be sustained. And yet for the last five years, our economy has more or less muddled through. How is that possible?

Most conservatives (real conservatives, anyway) don't believe in deficit spending and after the excessive spending of the Vietnam era, they may actually have a point. For decades, though, many economists—and they're not just moderates and liberals but include some curious conservatives—argue that a certain degree of deficit spending by the federal government can stimulate the economy. That's probably true, as long as it doesn't lead to excessive inflation and high interest rates (though economist can argue forever about what is 'exccessive'). But I remember an argument that was made during the Reagan era that it almost didn't matter what the federal government spent its money on: it would stimulate the economy. I wish I could remember who it was but one economist was frequently quoted who said that if you spent billions of dollars on new weapons and dumped them all out in the middle of the ocean, it would still stimulate the economy. This argument was used to ally fears about the excessive defense spending of the Reagan era. Unfortunately, the argument probably has some degree of validty. But only some degree. A simple counter-argument (and there are many) is that if you built a hundred thousand units of low-income, affordable housing out in the middle of Nevada a hundred miles from any jobs, you will somewhat stimulate the economy but it will still be a waste of time and not necessarily a smart economic move. Build those hundred thousand units in various places across the country that are experiencing just a modest growth in jobs and you may be on to something.

The effect of Bush's fiasco in Iraq on our economy worries me. It's not clear what we are spending hundreds of billions of dollars for. It's not clear that we will ever reap any real benefit from Bush and Cheney's reckless incompetence. Now here's a story by James Glanz of The New York Times about Iraq reconstruction that appears to be an embodiment of that idea of dumping weapons in the middle of the ocean, though here the things being dumped are those odd Iraq reconstruction projects:
Iraq’s national government is refusing to take possession of thousands of American-financed reconstruction projects, forcing the United States either to hand them over to local Iraqis, who often lack the proper training and resources to keep the projects running, or commit new money to an effort that has already consumed billions of taxpayer dollars.

The conclusions, detailed in a report released Friday by the Special Inspector General for Iraq Reconstruction, a federal oversight agency, include the finding that of 2,797 completed projects costing $5.8 billion, Iraq’s national government had, by the spring of this year, accepted only 435 projects valued at $501 million. Few transfers to Iraqi national government control have taken place since the current Iraqi government, which is frequently criticized for inaction on matters relating to the American intervention, took office in 2006.

The United States often promotes the number of rebuilding projects, like power plants and hospitals, that have been completed in Iraq, citing them as signs of progress in a nation otherwise fraught with violence and political stalemate. But closer examination by the inspector general’s office, headed by Stuart W. Bowen Jr., has found that a number of individual projects are crumbling, abandoned or otherwise inoperative only months after the United States declared that they had been successfully completed. The United States always intended to hand over projects to the Iraqi government when they were completed.

Of course, as we have so often seen, what the Bush Administration says is happening does not seem to square with what is actually happening on the ground. If Bush lies about Iraq and lies about such important issues as Social Security, it might be reasonable to suppose that what his administration says about the economy is not always accurate (conservatives might argue that even Bush's corporate friends need accurate information (and to some extent I find myself affected by that argument) but we have repeatedly seen that politics always trumps good sense in the Bush Administration—ask former Treasury Secretary Paul O'Neil how much good sense is appreciated by Bush and Cheney).

I recently wrote about how the Bush Administration measure of core inflation does not include oil and food despite the fact that rising oil and food prices affect every American. Part of the problem is knowing what is being measured, what statistics are being used, how long those statistics have been used, what statistics were being used in the past so that we can make proper comparisons and.... Ach! Everybody hates statistics! And the Bush Administration knows it. But good honest statistics are vital for Americans to understand what's going on. I wish Paul Krugman or Brad DeLong would write about how statistics are being used by the Bush Administration and what measures that are still being published are worth looking at.

Supppsedly in the second quarter of this year the American economy grew; here's the AP story in Forbes:
The best barometer of the country's economic fitness - gross domestic product - increased at a 3.4 percent annual rate in the second quarter, the Commerce Department reported Friday.

Businesses regained their appetite to spend and sold more good overseas, contributing to the improved performance. Stronger government spending also helped out.

Hey, an increase of the GDP of 3.4 percent is not too bad! ....If it's a real number. Keep in mind that rising oil and food prices are not included. Subtract those rising prices, and the increase in the GDP, if it is an increase, will be much smaller.

In the same AP article in Forbes is this little item:
Businesses ramped up investment elsewhere.

They boosted their spending on new plants, buildings and other commercial construction at a whopping 22.1 percent rate, the most in 13 years. Investment on equipment and software posted a 2.3 percent growth rate, an improvement from a meager 0.3 percent growth rate in the first quarter.

Now I have two observations. First, investments in plants, equipment and software is generally a good thing. But it's worth mentioning a caveat. Because of Bush's tax cuts, many wealthy people, particularly in the energy sector, are flush with money right now. Sometimes money is used—instead of efficiency and new ideas—to push competitors out of business. I once lived near a high-quality horse training track. A very wealthy man moved in to the area but got bored. He built his own track with no other purpose than to put the first track out of business. Not much good came out of the enterprise. It was not good business; it was just a big ego. Conservatives will argue that's the price of capitalism but the reality is that we have had periods in our history when there can be too much of that kind of thing.

That leads to the second point. Notice that much of the spending included new buildings. I would like to know more about that. I once lived in Orange County, California. The economy there was free-wheeling for many years. During one period of very rapid housing construction, grocery stores were sometimes found on all four corners of a major intersection. It didn't last. Sooner or later, one, two or even three of the stores were driven out of business. In good middle-class neighborhoods, there were suddenly empty shopping centers. It was self-inflicted blight. I can remember many other examples, including huge buildings left over from the collapse of the space program in the early 1970s. So it's important to know if these new business buildings are being used. And are the old buildings being used? Or are we in another period like the one Dallas experienced in the 1980s when large office buildings were built and suddenly had no occupants after the S&L and oil bust. The most recent example of over-extension and over-building, besides its own crookedness, was Enron. Thanks to the generosity of Bush and his Republican friends in Congress, I have no doubt there are still Enrons out there.

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Blogger Concerned Mercerians said...

I share your uneasiness. I don't understand how the greatest economy stays the greatest economy for long with such huge trade imbalances. And much of the blame will rest on greedy, unbridled capitalism. It seems to me the danger is often in the extremes. Communism and strict socialism do not work. But capitalism without restraint and some appreciation for the "common welfare" is also, in the end, self-defeating.

7:29 PM  
Anonymous Anonymous said...

You are right on the target about the ridiculous arguments of economic growth based on arms industry conviently deceitfully manipulated. This is the same argument Hitler used to spend huge sums from his poor treasurey (how he got money still a mistery after 70 yrs ) on arms industry in 1930's. You know the result. Unfortunatly That is the objective truth which doesn't support subjective reality we see. Whether history repeats it self or not, which seems to be repeats, the techniques used by so called powers , often dumb seems to be as in this article.
Amazing times we live in, May be that is socrates has to drink poison to be himself.

3:44 AM  
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9:32 AM  

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