Skip to comments.There Must Be Some Way Out Of Here
Posted on 07/18/2002 11:01:35 PM PDT by Uncle Bill
There Must Be Some Way Out Of Here
July 18th 2002 | WASHINGTON, DC From The Economist print edition
Americans are losing confidence in the economy. Can George Bush stem the slide?
THESE are not happy times for the White House. Share prices are tumbling, consumer confidence has fallen sharply and George Bush's own approval ratings seem to be heading down. For an administration haunted by the ghost of George Bush senior, whose defeat in 1992 was blamed on a sluggish economy, the parallels are becoming painful, not least because the current president's efforts to reassure Americans are also falling flat.
Mr Bush's trip to Wall Street to preach about corporate ethics was widely derided as too little, too late. This week's follow-up, a hastily-arranged pep talk on the economy in Alabama, proved another embarrassment. This economy is coming back, boomed Mr Bush. That's the fact. Meanwhile, in one of Wall Street's more dramatic days, stockmarkets slumped (though they recovered somewhat after he finished). It was all too close to Herbert Hoover, who famously proclaimed America's economy to be on a sound and prosperous basis in October 1929.
Judging Mr Bush's words by short-term movements in share prices is, of course, neither fair nor useful. The real questions are whether the White House has correctly diagnosed what ails the American economy, and whether its policies are right.
Mr Bush's basic contention is that the fundamentals of the American economy are in good shape. This was also the message of Alan Greenspan, chairman of the Federal Reserve, in congressional testimony the following day. At first blush, they have a point. Inflation is low and productivity growth remains surprisingly robust. Much of the excess investment that firms had built up during the boom has been worked off. Consumer spending remains surprisingly solid. Retail sales, for instance, rose 1.1% in June, far faster than analysts were expecting. The Fed has raised its forecast for economic growth in 2002 to 3.5-3.75%.
Yet despite these apparently good fundamentals, consumers are worried. The University of Michigan's consumer-confidence index fell sharply in July, to levels last seen in November. The main reason, of course, is the stockmarket slide (see article). Over the past two weeks alone the Dow Jones Industrial Average has fallen by 6%. The S&P 500 has dropped to levels not seen since October 1997. The technology-laden Nasdaq index is 72% below its peak in March 2000.
In large measure, this slide is the deflation of the 1990s bubble, a point Mr Bush himself hinted at: America must get rid of the hangover that we now have as a result of the binge...we just went through, he said in Alabama. But it has clearly been aggravated by the slew of corporate scandals and the loss of investor confidence.
Sliding equity prices could begin to hurt those fundamentals, promoted so assiduously by Messrs Bush and Greenspan. Household saving, in particular, may be found wanting as Americans re-evaluate what they can expect from their retirement portfolios. That suggests a protracted spell of sluggish, rather than buoyant, consumer spending. Capital investment could also suffer, if firms become more cautious about borrowing.
Unfortunately, there are scant signs that the administration will help counter this. In his Alabama speech, Mr Bush promised an agenda for long-term growth. This encompassed: fiscal policy (he wants to make his tax cut permanent, whilst forcing Congress to hold the line on spending); trade policy (he urged Congress to grant him fast-track authority to negotiate trade agreements); corporate reform (he touted his new Corporate Fraud Task Force, promised more money for the Securities and Exchange Commission, and urged Congress to send him an accounting-reform bill before August); boosting accountability in schools; and terrorism-risk insurance.
This grab-bag of assorted policies hardly constitutes a post-bubble economic agenda. Even if you thought it did, once you start going through the individual bits, the progress is patchy. For instance, the Senate certainly passed a tough corporate-reform bill on July 15th, and Mr Bush welcomed it. The next day Republicans in the House of Representatives promised to dilute many of the measures in the Senate bill (though they did agree to stiffer sentences for corporate criminals).
Nor do the prospects for trade policy look good. The Bush team has been pushing Congress for fast-track authority for 18 months. Legislation squeaked past the House of Representatives last December and the Senate in May. But reconciling the two bills has been difficult. If Congress does not get round to voting on fast-track by the August recess, the proximity of the mid-term elections in November suggests that the politically sensitive trade bill has little hope.
The biggest and most intractable problems, however, concern fiscal policy. Nobody seems to have absorbed how a post-bubble environment might influence the budget. On July 12th, the Bush administration announced that the federal government would run a deficit of $165 billion this year, compared with an earlier forecast of $106 billion made in February 2002. Although the economy has grown faster than expected since February, tax revenues have plummeted. Much of this revenue drop is due to the stockmarket, as individuals' capital gains have turned into losses. If the bear market lasts, so too will those revenue shortfalls.
In these conditions, Mr Bush's main fiscal policythat his 2001 tax cuts, ostensibly to be reversed in 2010, should be made permanentis hard to justify. If demand weakens substantially, there may be a case for more tax cuts (or spending) today. But it is hard to see the fiscal wisdom in making future tax cuts permanent at a time when revenues are so uncertain.
On spending, blame needs to be divided between the White House and Congress. Mr Bush talks tough on spending. He has threatened to veto a $27 billion supplemental budget bill that Congress has larded up to $31 billion. However, by agreeing to far larger, and permanent, expenditures (such as the massive farm bill) Mr Bush has lost the moral high ground. Congress, in turn, is closely divided, and short on any procedural systems for fiscal discipline. Finger-pointing and partisan bickering are far more likely in Washington than the confidence-inspiring policies that America's economy needs.
Copyright © The Economist Newspaper Limited 2002. All rights reserved.
Repeal the 16th amendment and abolish the income tax. Abolish the IRS and take away the citizenship of senior IRS officials and send them to Russia where they'll feel at home. Obliterate federal spending, and start to pay off the national debt in large chunks. Abolish "static scoring" with regards to taxation of any kind. Reinstate and restore the Constitution and Bill of Rights and abolish all laws, treaties, emergency orders and executive orders that have rendered it useless and return to the Constitutional boundaries of our constitutional Republic our founding fathers gave us. Importantly, repeal the Emergency and War Powers Acts. Repeal all laws created by unconstitutional and extraconstitutional devices, such as Executive Order or Presidential Directive. Repeal and abolish all unconstitutional federal involvement in states issues such as: crime, health, education, welfare and the environment, and only God knows how many other intrusions. Social programs such as Social Security, welfare and Medicare must be repealed. So too, do most federal subsidies. Rescind all treaties and International Agreements which are not in perfect agreement with the Constitution. Tell the United Nations to stuff it! The U.S. should disassociate itself from the U.N. and the U.N. should be forced to leave the United States. Destroy all documentation that links the U.S. with the U.N. See Arthur Andersen for details. Alger Hiss, screw you. Furthermore, demand that the federal government refrain from meddling in the business and squabbles of foreign nations, unless there is an imminent threat to the people of the United States. PROTECT OUR BORDERS!! Elect a real small government candidate for President, and the same for Congress. Take memory loss drug to try to forget that most Americans love socialism in about every way and that politicans are simply a reflection of themselves, and, none of the above is going to happen. Now, returning back to reality. Terrorism, shadow government, Stock market crash, federal government crash, Police State, Martial Law, gun-confiscation, FEMA, FBI, CIA, Dictatorship, T.I.P.S., Carnivore, Operation Magic Lantern, Echelon, The Patriot Act, Executive orders too numerous to count, slavery, death, One World Government. It could never happen here. For those of you not just interested in Medicare Part B.
HOW BIG IS THE GOVERNMENT'S DEBT? - $33.1 TRILLION!
Back to the Bubble: Why P/E Matters for the Dow - Ben Stein
"The market hasn't corrected at all for the sad truth that the New Economy's underlying assumptions turned out to be mistaken, and we're back in the same Old Economy with uniquely cruel business cycles, booms and busts. Just to give you an idea of how far out of historical whack the stock market is, consider this: Profits rise over the long term by about 4% a year, with immense deviations around the mean. If the earnings depression ends tomorrow and profits rise at 4% a year again, it will take roughly 14 years (not months, years) for the Dow's P/E to reach historical norms -- even if the Dow doesn't rise 1 point in those 14 years. Or, to look at it another way, the Dow would have to fall by about half for it to resume historical P/E behavior."
In this case, the "high ground" was nothing but a floating piece of 'solid matter' in the Cesspool called Washington, D.C.
Remarks by Chairman Alan Greenspan
"In practice, the policy choice of how much, if any, of the extreme market risk that government authorities should absorb is fraught with many complexities. Yet we central bankers make this decision every day, either explicitly or by default. Moreover, we can never know for sure whether the decisions we made were appropriate. The question is not whether our actions are seen to have been necessary in retrospect; the absence of a fire does not mean that we should not have paid for fire insurance. Rather, the question is whether, ex ante, the probability of a systemic collapse was sufficient to warrant intervention. Often, we cannot wait to see whether, in hindsight, the problem will be judged to have been an isolated event and largely benign.
Thus, governments, including central banks, have been given certain responsibilities related to their banking and financial systems that must be balanced. We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstances, through direct intervention in market events. But we also have the responsibility to ensure that private sector institutions have the capacity to take prudent and appropriate risks, even though such risks will sometimes result in unanticipated bank losses or even bank failures."
Interesting...the PPT believers are going to love this. Are we experiencing a "rare circumstance" where the government props up certain stocks, hmmmm.........
Here's one thing I've wondered about. Buying stock is so easy today. Could wealthy interests not fond of the US end up owning large proportions of companies which are important to the US economy and defense?
Looks like after having killed the bull, they are stripping out the last drop of milk from the cow now for themselves.
PLA Espionage Means Business
"The trail of Chinese agents of influence and enablers leads from corporate boardrooms to the White House. It is a vast spy network that now has tapped into billions of dollars of U.S. pension funds to support military activity, according to Roger Robinson, former senior director of international economic affairs at the National Security Council.
...All of this is part of a master plan that uses U.S. political leaders and lobbying efforts from big-bucks political donors to get export licenses for China, intelligence sources say."
It can work both ways:
I'm actually kind of discouraged by the short time frame of those who are calling this "capitulation" and "destruction of financial well being" and all. I don't see "room for rent" signs on palatial-like houses, or "for sale cheap" signs on gas guzzlers. No people who've lost their jobs are offering to do manual labor in order to feed the kids. There are no massive crowds at day old vegetable counters or used clothes outlets.
I just don't think anyone knows where this is going; there are too many unknowns and new input in the current mix. And still those with agendas keep on looking out for their own interests, not what's best for the country as a whole.
You know what got me? All that money to prop up the airlines, and a reluctance to help AMTRAK break even. There are people who, for physical or psychological reasons, depend on the train, to get around the country. The shortfall is miniscule...yet it took an outcry to get this funding.
People at the lower rungs lose jobs to immigrants. Their 401Ks have been decimated. Their lifestyles are threatened. It's their children who would fight a physical war on terror. Yet, it's still about corporate crooks and business, not about average people.
I'm still formulated my reactions to all of this, obviously. But it seems pretty naive for anyone to say they can predict or control the future.