Paul Krugman: Economic Storm Signals

Paul Krugman senses trouble ahead:

Economic Storm Signals, by Paul Krugman, Tough 2007, Commentary, NY Times: “It’s tough to make predictions,” Yogi Berra is supposed to have said, “especially about the future.” Actually, his remark makes perfect sense to economists, who sometimes have trouble making predictions about the present. And this is one of those times ... economists’ assessments of the current state of the U.S. economy, never mind the future, are all over the place.

And here’s the bad news: this kind of confusion about what’s going on is what typically happens when the economy is at a turning point... At turning points, the various indicators ... often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.

Before I explain what the bond market is telling us, let’s talk about why the economy may be at a turning point. Between mid-2003 and mid-2006, economic growth in the United States was fueled mainly by a huge housing boom... That housing boom has now gone bust. But the optimists and pessimists disagree both about how bad the bust will get and about how much damage the housing slump will do to the economy...

Most, though not all, of the ... economic numbers that came out this week were ... substantially weaker than expected. Pessimists feel vindicated by the downbeat data. Nouriel Roubini..., who has been forecasting a housing-led recession for some time, ... predicts zero growth for the current quarter. Economists at Deutsche Bank say the same thing.

But that’s still a minority position; most forecasters are still telling us not to worry. So whom should you listen to? And how can you avoid believing what you want to believe?

Maybe the best answer is to look at what the financial markets say. Not the stock market, which is a notoriously bad indicator of the economy’s direction, but the bond market. (Paul Samuelson, the Nobel Prize-winning ... economist, famously quipped that the stock market had predicted nine of the last five recessions).

Since last summer, when the housing bust became unmistakable, interest rates on long-term bonds have fallen sharply. They’re now yielding much less than short-term bonds. The fact that investors are willing to buy those long-term bonds anyway tells us that these investors expect interest rates to fall. And that will happen only if the economy weakens, forcing the Federal Reserve to cut rates. So bond buyers are, in effect, betting on a future economic slowdown.

How serious a slump is the bond market predicting? Pretty serious. Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. And since even a slowdown that doesn’t formally qualify as a recession can lead to a sharp rise in unemployment, the odds are very good — maybe 2 to 1 — that 2007 will be a very tough year.

Luckily, we’ve got good leadership for the coming economic storm: the White House is occupied by a man who’s ideologically flexible, listens to a wide variety of views, and understands that policy has to be based on careful analysis, not gut instincts. Oh, wait.

_________________________
Previous (11/24) column: Paul Krugman: When Votes Disappear
Next (12/4) column: Paul Krugman: Two More Years

Comments

[evagrius]

"Luckily, we’ve got good leadership for the coming economic storm: the White House is occupied by a man who’s ideologically flexible, listens to a wide variety of views, and understands that policy has to be based on careful analysis, not gut instincts. Oh, wait."

G.W. Bush, right?

I knew it couldn't be Clinton!

[ken melvin]

Goat entrails are better.

[elvis]

I think he meant, "Oh, wait for 2008."

[calmo]

That is a pretty sly note about the current uncertainty being the grounds for even more uncertainty about the future.
Why are we so uncertain about the present state of the economy? Are we more uncertain about it than we were during the last runup to a recession? Are we particularly conditioned nowadays (compared to themoldadays) to keep moving forward (no matter the sewer we just happened to step into) and make progress (no matter that it leads straight to hell)?
Are we (humble bloggers nibbling away at the smallest little morsels) that uncertain or is it that we are quite certain we are being fed a rosy line by the 'forever growing economy' boys? No, I'd say (with some certainty) even the last election shows ordinary people are not buying that.
So ordinary people know (with reasonable certainty) that they are inforit and are relying on professional economists to let them know just whenitis and howitwillbe. These people are not as buzzed-up by the probability of a Recession as the economists IMO who take this as their opportunity to hit the Homer or strike the Homerun King out.
Sorta.

[Nicholas Gruen]

I am a great fan of Krugman, but he's a worrier. He's been preaching doom for a long while. Perhaps it will come to that, but it hasn't since he started prognosticating about the US slipping into a Japan style economic quagmire.

[Lafayette]

The difference between today and then (2001) is that world economic growth is NOT dependent upon what is happening in America. In 2001, the world was reacting to a dot.com tech bubble that was bursting and showing that p/e ratios were hallucinating.

The Asian countries are showing determined strength and Europe seems to be instilling the kind of faith that consumers need to spend their way out of stagnation (but weak inflation).

The question is: "Can the world drag the US out of a serious recession?" That depends upon how serious it will get, but if the US pays more attention to global markets (as the current depreciation of the dollar would allow) then the world can certainly mitigate the oncoming Bush "recession".

[Movie Guy]

While I expect that the USA will have a recession at some point, what is a bit unusual in my opinion is the number of econos and others who have complained so loudly and so frequently about the terrible U.S. economy. While not perfect, this economy has continued to perform reasonably well.

But that wasn't enough as some have, as evidenced in some commentaries, been hoping for a hard recession. The bias is occasionally very evident.

There is something quite sick about such attitudes.

Unfortunately, Paul steps into that line of thought with his closing paragraph (as shown above). It's not only unnecessary, it's unprofessional.

But this is the USA in the 21st Century, absent considerable class and bearing on many fronts.

So, by all means, let's have a hard recession so that we will hear complaints just that much louder.

By all means. And do gloat.

[maria]

Yeah MG, if people like Paul would only stop being so negative there would be no recession. I mean it is always just the result of the wrong sort of talk, right? BTW the Fed calculator of recession probability based on the yield curve is now at 53.4%. It has been mounting upward steadily in recent days.

[Paris_ib]

The U.S. economy has continued to perform reasonably well over the past decade because it had access to a lot of free money from the rest of the world. Attracting Foreign Capital was EASY. As Central Banks, particularly in Asia post the Asian crisis, moved to build up their reserves the U.S. Treasury had no trouble funding itself and the U.S. was able to run a fairly hairy current account deficit without any outward sign of strain. Loads of virtually free money flooded in, creating the illusion that the U.S. did not even have an EXTERNAL CONSTRAINT.

Things have changed big time. First, George W. has successfully made an enemy of pretty much everyone in the wider world. The Bush Administration has increased the U.S.'s funding requirement and antagonised a lot of people AT THE SAME TIME. Second, Central Banks of the world are no longer building up their Foreign Exchange Reserves exclusively in Dollars and are talking DIVERSIFICATION and third, the global interest rate environment is no longer as benign as it was. Rates, in case you haven't noticed are rising pretty much everywhere. The time of virtually free money is over and the U.S. will have to start paying the piper.

That means: hard time ahead.

[anne]

What is so surprising about this economy is just how weak the recovery from a mild recessions has been, for all the absurd tax cuts for the wealthiest and massive spending, not for domestic well-being, but spending for war in and occupation of Iraq. We have tax cuts and military spending and low long term interest rates, but growth is relatively weak.

Am I complaining, yet?

[Lafayette]

NG: "I am a great fan of Krugman, but he's a worrier. He's been preaching doom for a long while."

So, he knows his market. Doom sells newspapers. (Everybody wants to know the date so as to sell thier stocks beforehand ... ;^)

[spencer]

The long term growth rate of the US economy has been for 3.5% real gdp growth. since bush took office real gdp growth has averaged about 2.5% and we have had only one year of above trend growth.

congratulations team Bush -- you have implemented an economic policy that managed to reduced growth to about a full percentage point below trend.

[bailey]

I feel PK's frustration & anger, we all should. To honor their true god, Thomas Hobbes, this administration & its companion Congress has dug a hole our kids & grandkids might never climb out of. But, PK's deservedly been on top of the economic heap long enough to know it's his turn to provide academic clarity to the delemma we face.
Are we caught in the liquidity trap of all time? What are our prospects in a post-manufacturing economy sans creating another financial bubble du jour? Is it rational to expect China to float its currency to help us address our addiction, & would that in fact "fix" anything? Do we NEED a single regulatory agency to monitor our financial community post Glass-Steagall repeal? Is there ANY way to unwind our money center banks derivative exposure?
So I ask, has PK reached his exasperation point because he sees NO way out of the mess we're in? Its time he put aside his political axe & return to what he's truly extraordinary at, making sense of macroeconomic alternatives. I've been an ardent PK groupie for 15 years, it's time he lead, follow or take a sabbatical.

[Lafayette]

anne: "We have tax cuts and military spending and low long term interest rates, but growth is relatively weak."

From the Economist: "Stephen Slovinski, a scholar at the Cato Institute examines the development of big-government conservatism programme by programme. He explodes the claim that the Bush administration's vast increase in public spending can be attributed to the new demands of national security and the war in Iraq, costly though these are. In recent years, the administration has chosen to spend profligately even in areas where it was under no compulsion to do so. Public expenditures have risen faster in America than at any time since Lyndon Johnson."

If true, then this assumes that the Republicans have become the "untax and spend" party, which certainly does no good for the deficit ... except push outward its payment a generation.

Now, there's a fine argument to recapture America's youth. But, I doubt the woolly-haired mammoths of the Democratic Party will understand either the reasoning or the opportunity at hand. Remember, despite the so-called victory, the Democrats are still under control of the party's old guard.

[anne]

Thank you, Lafayette. When there is time in a while I will read the article and look to data, but supposing we agree that domestic social benefit programs have been increased significantly the problem becomes more troublesome. With long term interest rates so low, with ample tax cuts and domestic spending increases, why are we not growing faster?

[maria]

Hot from the news wires:

October Construction Activity Plunges by Largest Amount Since 2001 Recession

[maria]

Manufacturing ISM comes in a 49.5 vs. consensus of 52.2. Real shock. Recession probably already here.

[anne]

http://norris.blogs.nytimes.com/?p=88

November 17, 2006

Housing Starts and the Economy
By Floyd Norris

Let's hope it is 1966 again.

That was the only time when single-family housing starts showed a year-over-year decline of more than 30 percent and the economy did not fall into recession.
In all the other such declines, since the numbers started being collected in 1959, the economy either was in a recession — in 1960, 1970, 1973, 1981 and 1991 — or on the verge of one, in 1980.

Today's report on housing starts finds that in October, 102,800 single-family homes were constructed, for a seasonally adjusted annual rate of 1,177,000 homes. That was the lowest October since 1997, and the lowest annual rate for any month since December of that year. The decline from October 2005 was 31.8 percent....

[Lafayette]

anne: "With long term interest rates so low, with ample tax cuts and domestic spending increases, why are we not growing faster?"

America had significant growth over the past five and perhaps even ten or fifteen years attributable to the "feel-good-factor" (f-g-f). At first, and under the Clintonites, it was speculative riches earned from equity revaluations. Then (or perhaps contemporaneously) there was the unlocking of residual realty wealth in re-mortgaging.

It doesn't take much to ignite consumer demand ... Americans are not great savers.

What is happening now is a reawakening of the stock market but perhaps many people have not yet recuperated their "initial values" lost when the dot.com bubble burst. It is instinctive to want to recuperate what one considers as "losses". So, there is no or little effect on the f-g-f, because the average joe’s current position is perhaps not bad but not nearly as good as it was.

Also, mortgage rates are rising and, as we all know, a real estate market depends upon newcomers who must initiate the cycle by stepping onto the escalator. If this doesn't happen, then the market does not move upward as people sell and buy, then sell and buy again and again - thereby taking the escalator upwards. Rising interest rates do not augur well either for real-estate first-timers or those already on the escalator – even if average housing prices may decline.

Since the escalator is not moving upwards, the f-g-f is not stimulating sufficient consumer demand for real growth.

It is purely cyclic. The only constant in economics is change.

Americans took to easy money with a frenetic passion in the 1990's. There's another lesson in store for the foreseeable future. It's called "patience"?

Remember when patience was a virtue? I do.

[Bruce Wilder]

People, who see Krugman as nothing but a Gloomy Gus completely miss the point of his jeremiads. For six years, he's been pointing out that you cannot elect an idiot, President of the United States, allow him to enact one stupid and destructive policy after another, and expect good results.

It is not simple pessimism to expect obviously unwise policy to eventually have bad results. It is realism. And, anything else is delusion.

I have problems with the whole business of "forecasting" a recession, anyway. It sounds too much like forecasting the weather. If I am always expecting rain and cold and gloom, I am a pessimist (or living with Mark in Oregon ;-), but I didn't make the weather, it just happens.

The U.S. economy, as complicated as it is, doesn't just happen; we do it: we operate the economy, we drive the economy, however you want to express it, the economy is a system, a machine creating, distributing material life. Recessions are sometimes a matter of hitting an unexpected bump in the road or swerving around an unexpected obstacle (or sometimes just swerving because we don't know what we are doing); more often, a recession is a particularly graceless shifting of gears or switching of gas tanks. Resources have to move from one sector of the economy to another en masse, and it doesn't go well, and a significant fraction of resources are left unused for a time -- unemployment. Unemployment, of course, is a waste, and, frequently a hardship.

Housing presents a rather obvious set of sectors, which will be shedding resources over the coming months. Duh.

Using the yield curve as a "predictor" strikes me as an odd form of reasoning: the bond market as oracle. The thing that strikes me about the bond market is that it is engaged in transactions and not prognostication, per se. Krugman makes it sound like bond buyers are just parking money at fixed terms. In fact, the bond market is driven by various kinds of arbitrage-seeking, including inter-temporal arbitrage by what are, in effect, financial intermediaries, exploiting their superior acumen to better manage the risks of long-term lending than most people with spare cash. Interest-rate risk, after all, is only one, usually small factor in long-term lending; the larger risk is that a particular borrower is not going to pay back the loan -- that risk is usually significantly larger for long-term than short-term lending, and can be managed by people, who pay close attention. An inverted yield curve indicates that long-term lending by those intermediaries, who would ordinarily be borrowing short to lend long, taking advantage of superior information, presumably, about who is a good long-term risk, is grinding to a halt. That's why the yield curve is such a good "predictor" of recessions; an inverted yield curve is, literally, a mechanism that can cause a recession, by severely restricting new long-term borrowing/investing.

Even when other factors intervene, an inverted yield curve is not a good thing, because the decline in informed intermediation in long-term lending can amplify the risks of defaults down the line. It is too little appreciated, I think, that in the ordinary course of financial and investment life, the world is awash in loanable funds. The great difficulty is not in obtaining funds for investment, it is avoiding loaning funds for investments, which will end up yielding a negative return. Intermediation must pay, if this is all to work out.

Inflation gets a bad rap. A little inflation is a good thing, because it puts pressure on people with loanable funds to seek investment opportunities, and can provide a pleasant cushion for intermediaries to work with.

Where I get foggy is in understanding the effect of currency exchange and the routine arbitrage between interest rates in one currency and another. Somehow, though, the slide in the value of the dollar, much anticipated to continue, must play some large part in both why the yield curve has inverted and how that will affect the economy's course.

[Bruce Wilder]

anne: "Let's hope it is 1966 again."

Let's not hope that.

As I recall, all that buoyancy was McNamara spending way too much to kill people in Vietnam. That's not a parallel I would like to see repeated.

[maria]

Anybody here think we are NOT going into a recession?

[Dave Iverson]

Bailey: "...has PK reached his exasperation point because he sees NO way out of the mess we're in? Its time he put aside his political axe & return to what he's truly extraordinary at, making sense of macroeconomic alternatives. I've been an ardent PK groupie for 15 years, it's time he lead, follow or take a sabbatical."

Lead from where? I think Krugman's doing fine from where he is. Besides, there is no one in THIS Administration who will reach out to him for leadership...

Mostly, though, I'm waiting to see who (if anyone) responds to Maria's question just above, and worth repeating: "Anybody here think we are NOT going into a recession?"

[anne]

Again, I have to go through figures in a while but my understanding is the spending involving Iraq is proportionally more than comparable spending during Vietnam. Beyond my abhorrence of the occupation of Iraq, and my complete conviction that we must leave Iraq immediately, why is the tax and spending and low long term interest rate effect seemingly less now than in the 1960s?

[anne]

There is to me a reasonable chance we will avoid a recession, though market movements reflect concern. For me, low long term interest rates and fairly low unemployment and strong international business activity and strong commercial real estate activity are enough of a cushion to keep us growing. I am cautious, but hopeful.

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/05 to 11/30/06

S&P Index is 14.1
Large Cap Growth Index is 8.9
Large Cap Value Index is 19.3

Mid Cap Index is 13.9

Small Cap Index is 15.6
Small Cap Value Index is 18.7

Europe Index is 29.9
Pacific Index is 8.5
Emerging Markets Index is 24.2

Energy is 21.1
Health Care is 9.7
Precious Metals is 35.1
REIT Index is 37.6

Long Term Bond Index is 4.8
Intermediate Term Bond Index is 4.7

[Boomer]

Maria
The majority of Americans are already in a recession.

[JRossi]

Krugman's last paragraph was not called for. Myabe his sarcasm plays well to some, but I find it very annoying. He probably got punched around too much as a kid.

[maria]

Anne: figures out today show that October non-residential construction was 0.7% below September. And residential construction much lower.

[anne]

My, my, we must be ever so nice to and ever so gently with the President who is responsible for turning a stunningly strong economy of 8 years, an economy that was creating 235,000 jobs a month with no inflation and a budget surplus large enough to supposedly worry Alan Greenspan, to an economy that is, well, defining job creation and other measures of economic health down. My, my. Nice job, Sweetie.

[me]

From WSJ Market Beat

for-hire Truck Tonnage Index dropped 1.8 percent in October after increasing 1.6 percent in September.

On a seasonally adjusted basis, the tonnage index fell to 110.8 (2000=100) from 112.9 in September. The latest reduction put the index at its lowest level since the end of the 2006 first quarter. The index decreased 4.0 percent compared with a year earlier, marking the largest year-over-year decrease since February 2001. Year-to-date, the truck tonnage index was down 2.1 percent, compared with the same period in 2005. The not seasonally adjusted index increased 4.7 percent from September to 117.7."

"The news prompted David Rosenberg, chief North American economist at Merrill Lynch, to note that it “is extremely rare to have truck tonnage go down in October ahead of the holiday shopping season — declines of the likes we saw last month took place in 1981, 1982, 2001 and 2002, and these proved to be disappointing sales periods.”

“Truck tonnage for October just came out and looked borderline recessionary, for lack of a more polite term. It was down 4% y/y in the largest decline since February 2001 (-1.8% m/m, and down now in two of the past three months) - and now down for 10 months in a row y/y (!). You have to - again - go back to the March/00 to Feb/01 period to find the last time year-on-year comparables were in the red for such a long stretch of time (and guess what happened in March/01?).”

[anne]

Thank you, Maria. Going over numbers now, I am not pleased, and know well besides I may be less realistic than I should be. A long term Treasury interest rate below 4.5% is not as comforting as I am trying to make it.

[maria]

Whether you like Krugman's (mild) sarcasm probably depends upon how much you like Bush. I regard him as the very worst President ever, the reckless and unrepentant cause of thousands of innocent deaths and untold misery for millions, so I like it just fine and think it if anything too gentle. Much too gentle.

[spencer]

anne -- current spending on Iraq may be comparable to vietnam in current dollar terms. But in terms on manpower and equipment it is much less. Iraq is costing us something like 1% of gdp -- the current near 4% actual spending less the around 3% military spending in the late 1990s. Vietnam spending was some 3%-4% of gdp.

says...

Anne - quit spamming the board with your Vanguard garbage. Grow up and make one long post

You must have been hated in school, the annoying little brown noser

says...

Anne - please explain the relevanc eof the Vanguard stuff? We await with bated breath.

[maria]

Anne is a valued contributor to the board and anonymous slaps are her are very much out of line.

[anne]

Thank you, Spencer. Yes; real spending on Iraq is higher than spending for Vietnam but considerably less as a percent of GDP. So, the growth effect is less. Also, the deficit as a percentage of GDP is moderate and not the stimulus it might be for all the complaints about deficit spending. There appears however no reason to consider social benefit spending as a budget problem. The deficit problem, such as it is, for now is lower tax revenue.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4964&exhibition=4&pass=public&size=default&lang=eng

Yellow-breasted Chat
New York City, Central Park--Strawberry Fields.

Thank you, Maria.

[JohnDewey]

spencer: "The long term growth rate of the US economy has been for 3.5% real gdp growth. since bush took office real gdp growth has averaged about 2.5% and we have had only one year of above trend growth."

It depends on what you consider long term.

No question that the U.S. economy grew faster the first two decades after World War II. That's when both European and Asian manufacturers had to rebuild. Their rebuilding meant the U.S. had little competition, and the U.S. had large markets for industrial goods.

More realistic periods are either the past 30 or 40 years. Over both periods the average real growth in GDP was 3.2%.

Bush tax cuts were phased in, of course, with most being implemented in the middle of 2003. Here's the GDP growth in the first four years that a Bush budget was in place:

2002 _____1.6%
2003 _____2.5%
2004 _____3.2%
2005 _____3.9%

Calendar year 2001, when the growth rate was a mere 0.8%, coincides with the fiscal year 2001 policies of President Clinton.

For what it's worth, I believe any president has only a little control over the U.S. economy. Of course, the Fed can ruin the economy with overly tight controls or with rapid expansion of the money supply. Congress can ruin it with protective trariffs. But by and large, the economy will keep on humming if government can just keep its hands off.

[JRossi]

I don't like Bush any better than anybody else does. I just dislike the sarcasm because it debases public discourse. Compare Krugman's last paragraph with this:
"Unfortunately, we do not have good leadership as the economic storm approaches. The White House is occupied by a man who is ideologically inflexible, who does not listen to a wide variety of views, and who does not understand that policy has to be based on careful analysis, not just gut instincts."

[lonesome moderate]

I, for one, very much appreciate Anne's stats. She obviously uses those as one of the data source for drawing her own conclusions. I, and probably others, have specifically requested that she share more stats with us so that we can draw some conclusions of our own, and am glad to see every number she shares, even if they are occasionally repetitive.

As for the relevance, or lack thereof, one person's garbage is another's gold. I remember that one of Alan Greenspan's favorite statistics for predicting economic trends was the number of railroad freight cars moving around; no one else understood what he got from this, but it seemed to work for him.

[anne]

JRossi, I understand, and Paul Krugman, who is mouse mild when speaking, writes fiercely. There are passages about John Kenneth Galbraith, I have been angry about for a long time.

[maria]

Yield curve predictor of recession now at 54.3% probability. Highest ever. Keeps going up and up.......

[Lafayette]

MG: "While not perfect, this economy has continued to perform reasonably well. But that wasn't enough as some have, as evidenced in some commentaries, been hoping for a hard recession. The bias is occasionally very evident. There is something quite sick about such attitudes. "

Your judgement depends upon your yardstick. What's your yardstick? Jobs? Profits? Equity values? House prices? Labor unit cost?

Or, health insurance coverage? Cost of medicines? PISA educational scores? (Do you know what PISA is?) Cost of mortgages? Dislocation of jobs?

Looking through the prism of just jobs, and only jobs, then, yes, the economy looks just rosy ... compared to parts of the world much worse off.

[JohnDewey]

Lafayette,

I don't understand why we should consider health insurance coverage or educational scores as economic measures. It's equally unclear why housing or medicine prices would be separately included. Those last two would, I think, be included in the conversion of nominal GDP to real GDP.

For me, the relevant measures of any economy must be macro measures such as real GDP growth, level of employment, and some income measure such as median household income. The first two have been doing very well, and the third has finally began to rise in 2005.

Before 1980 median incomes resumed growth immediately after the end of recessions. The 1979 and 1981 recessions were so close together, and the latter so deep, that we can't really classify that period as normal. For some reason, median income growth was sluggish after both the 1990 and 2001 recessions.

Can you think of another economic measure - not a social policy measure - that should be included to asses the economy of the U.S.?

[lonesome moderate]

For what it's worth, I for one don't believe that we are heading into a recession, my guess is 0 - 2% economic growth over the next year, with all or almost all the benefit continuing to go to the top 1%. We will have to compensate for the real estate bubble with exports, but I see no reason why we won't be able to do that to some extent. Here in Silicon Valley we are undergoing something of a boom at the moment, although I don't see a lot of benefits trickling down.

[calmo]

Ok, maria there won't be a RECESSION.
Only a severe downturn. (You figure that is so wimpy? You figure the stampedability of 'recession' will diminish when 'revolution' starts to become prevalent on those radical blogs?) [We will suffer a correction of modest proportions and live another day.]
And we will live happily ever after only provided you keep defending brave bloggers against chicken-*hit ad hominems...
Speaking of which, JRossi, were you pushed around on the playground as a kid or were you slain in class by vicious sarcasm?
PK's original please --accept no Rossi improvements.

[evagrius]

Lafayette;

"I don't understand why we should consider health insurance coverage or educational scores as economic measures. It's equally unclear why housing or medicine prices would be separately included. Those last two would, I think, be included in the conversion of nominal GDP to real GDP."
Yes. Only money counts.

[dissent]

"why is the tax and spending and low long term interest rate effect seemingly less now than in the 1960s?"

Because of the global labor arbitrage. With the cost of labor falling, and the profits from this going exclusively to the corporatists, we don't have a broad increase in domestic prosperity. In fact we have soaring inequality. Retail for this holiday season already reflects the divide: bad data at Wal-mart, stellar data from Tiffany's.

[save_the_rustbelt]

When people have to limit their shopping at Wal-Mart you know the family budget is really tight.

If i remember correctly I called the next recession for 3rd quarter of 2007. I will stick with that - bad mojo out there.

[piglet]

"The majority of Americans are already in a recession."

I think that is themost adequate answer to maria's question. We all know in principal that GDP is too crude a measure to be a useful indicator - let alone the sole indicator - of economic well-being. We should take our knowledge seriously and stop paying tribute to flawed economic concepts.

"For me, the relevant measures of any economy must be macro measures such as real GDP growth, level of employment, and some income measure such as median household income. The first two have been doing very well, and the third has finally began to rise in 2005."

Median household income has decreased since 1999, and it increased in 2005 for the first time in years only because people were working longer hours - wages actually declined. What is amazing is that nobody talks about this abysmal record. We discuss whether there'll be a recession or stagnation next year, but by all measures, most people have already been experiencing recession or stagnation for years.

[maria]

Recession probability now up to 54.6%. Ever higher and higher. No doubt in my mind now. October motor vehicle sales should be out now, but Bloomberg hasn't posted them yet.

[Cyrille]

Because of inequality itself. The tax cuts went to people who then just trade in the markets. But not to people who will spend -or even to people who will create a small business. I don't actually find the lack of response from the tax cuts surprising at all.

[piglet]

Here's the Census Bureau speaking (August 29, 2006):

« * Income: Nationally, 2005 marked the first year since 1999 in which real median household income showed an annual increase.

* Earnings: Real median earnings of males age 15 and older who worked full-time, year-round declined 1.8 percent between 2004 and 2005, to $41,386. Women with similar work experience saw their earnings decline by 1.3 percent, to $31,858.

* Poverty: There were 37 million people in poverty (12.6 percent) in 2005. Both the number and rate were statistically unchanged from 2004 and marked the end of four consecutive years of increases in the poverty rate (2001-2004).

* Health Insurance: The number of people with health insurance coverage increased by 1.4 million to 247.3 million between 2004 and 2005, and the number without such coverage rose by 1.3 million to 46.6 million (from 15.6 percent in 2004 to 15.9 percent in 2005). Between 2004 and 2005, people covered by employment-based health insurance (174.8 million) declined from 59.8 percent to 59.5 percent. The proportion and number of uninsured children increased between 2004 and 2005, from 10.8 percent to 11.2 percent and from 7.9 million to 8.3 million, respectively. »

With data like that, who needs a recession?

[evagrius]

From the FRAC site;

In August 2006 food stamp participation at 26,127,843 persons was up over the month by 136,800 people. The overall caseload for August 2006 was 362,308 persons higher than the prior August and nearly 8.4 million persons higher than in August 2001. Nonetheless, the Program still is missing nearly four in ten eligible people. At a time when more than 35 million people in the US face a constant struggle against hunger, continuing to strengthen the reach of the Food Stamp Program is vital.

Food Stamp Program growth in recent years reflects continuing wage stagnation, state actions to improve access, the effects of the 2002 food stamp reauthorization implementation, and disaster relief. In late 2005 caseloads grew significantly to serve victims affected by Hurricanes Katrina, Rita and Wilma, but largely have returned to pre-disaster relief levels.

[maria]

Reuters story yesterday estimated motor vehicle sales at between 15.9 and 16.3 million. Bloomberg has consensus of 12.5 million. Figure should have come out at 4pm EST. Still not available. But Ford says its sales fell 9.6% in November. Maybe news to bad to print. Honda's essentially flat. Should have total figure soon.

[adam]

one of the guests on kudlow just said that krugman has predicted 9 of the last zero recessions and is the worst recession predictor out there.

[donna]

Um, what are we exporting?

Just got back from a trip to Tucson - trains to the east loaded with Chinese goods, trains to the west empty.

I realy don't see much exporting going on here - is there something about the trade deficit you know that I don't?

[maria]

A guest on Krudlow? Don't make me laugh.

Motor vehicle sales for November now in. 11.8 million vs. consensus estimate of 12.5 million. Yup, calmo, no chance of a recession. Now I am laughing.

[john c. halasz]

This is a question I posted chez DeLong a couple of years ago or so, but I didn't receive any answer: to what extent was the ostensible rationale for the Bush tax cuts "grounded" in Romer type long-run growth theory? Anyone?

[JRossi]

Calmo, Neither. I tried to treat others with dignity and respect, and I found that people generally treated me the same way.

[JohnDewey]

donna: "Um, what are we exporting? Just got back from a trip to Tucson - trains to the east loaded with Chinese goods, trains to the west empty."

In September, 2006, the U.S. exported $67 billion manufactured goods, including:

... $5.5 billion aircraft and parts;

... $11.2 billion chemicals;

... $7.2 billion electrical machinery;

... $7.0 billion motor vehicles;

... $3.4 billion scientific instruments;

... $10.3 billion industrial machines.

Also in September, the U.S. exported $34.5 billion in services.

Source: U.S. Census Bureau

[evagrius]

Mr. Dewey- You forgot the other information.

The U.S trade deficit was $64.3 billion for September, a slight decrease from August.

[calmo]

See eva we B improving: slight decrease and JD deserves credit for trying to improve our spirits (no matter how some sarcasm-sensitive some brutes may be).
I too noticed that GDP (preliminaries-not-yet-finals) were somewhat better than GDP (advanced-mere-guesses) by 0.6% --it was the improved trade sector that took the lion's share of that adjustment (I thought 0.4% but BR says half that and who am I to contest with The Sweater?). Not exactly as JD shows: imports were less, rather than exports more.
I thought this was good news: more consumer restraint than imagined.
Until recently with all that embarrassing hoopla about Shoppin...so painful.
But look at that one item that might be interpretted as a consumer good in JD's list: we exported $7B worth of autos despite a crumbling domestic auto market (that made a 0.6% bump in GDP last quarter and may take more than that away next quarter). We need to persue the issue of who's buyin our cars and why.
Or quit shoppin.

[ninjaplease]

Gee Wiz John Dewey, Look what else the census bureau has posted:
http://www.census.gov/foreign-trade/
Press-Release/current_press_release/exh2.pdf

Oops there goes the our sunny skies and rainbows!!

Tell me, how big is your christmas bonus going to be at Goldman Sachs this year?

[ninjaplease]

http://www.census.gov/foreign-trade/Press-Release/
current_press_release/exh6.pdf

Guess I'll just ignore the above link while driving in my SUV or minivan to the soccer game or watching my flat screen TV in my new McMansion.

reality is different.

[mrrunangun]

I thought recessions were periods in which debts accumulated in prosperity were liquidated. The seventies seemed like one long recession to me, liquidating the government and private debts produced in the sixties and first couple of years of the seventies. Much of the liquidation was done via inflation then.
As long as globalization is so great a feature of contemporary economic life as it is, economic equality will suffer. If unskilled American workers have to compete for employment with low wage foreign labor or even nonunion domestic labor, their economic positions are bound to suffer compared to those who do not face such competition.
Our best near term hope may be that China's rulers so fear the political instability that an economic slowdown there would cause, that they will continue to give us cheap loans so that we will continue to buy their cheap goods. That doesn't help American manufacturing workers though. Those cheap loans may lead to more financial bubbles while we (slowly?)inflate our way out of debt again.

[Movie Guy]

Spencer - The long term growth rate of the US economy has been for 3.5% real gdp growth. since bush took office real gdp growth has averaged about 2.5% and we have had only one year of above trend growth.

congratulations team Bush -- you have implemented an economic policy that managed to reduced growth to about a full percentage point below trend.

Spencer and all others,

What would you have done differently if you were the President or Secretary of Treasury? Please be specific.

Spencer, you have quite a database, so you should know very well that the ongoing corporate and company offshoring and contracting out (overseas and domestic) initiatives have continued to ramp up, draining well over 1 percent GDP annually out of our economy. That's value added loss of at least $1 trillion annually.

Did you expect this Administration to reverse the trade policies of the last Administration or those immediately before it which were focused on reducing inbound trade barriers? Did you expect the U.S. to withdraw from the WTO or not provide most favored nation trading status to China (a WTO requirement)? I can hear the howls now had that happened. Corporate America would have gone off the deep end.

Odd that no one has mentioned Greenspan. Care to address his role in all of this? He was on station before this President rolled in.

Did you or anyone else expect a repeat of the dot.com boom of the 90s? If so, why? And with what product? It was a phony exercise and since that time the anticipated economic entity consolidations have occurred. Anyone thinking that we would again mimic the dot.com economy is nuts.

So, where does that leave the USA? Declining real wages and now real benefits - many of which are driven by globalization drainage and/or competition or the threat of such. Declining mid to high skill opportunities for those production workers who were pushed aside. Declining support base operations that used to support all of former production facilities. Add all of those production support losses to the GDP loss column while you're at it.

Do you question my explanation provided previously in the Economic Hydrology Theory summary? If so, please explain. We know where the low and high tech production, along with the R&D centers, are headed - it's called offshore. And almost all of the Fortune 500 corporations and a helluva lot more corporations and companies have shifted operations overseas.

Frankly, we're lucky that the economy has performed as well as it has considering the valued added production that has been stripped from our economic base. It is clear that services are not an adequate substitute for goods production losses as the net losses are showing up in the GDP figures. Just selling boxes of goods or data isn't going to cut it if we intend to balance the books or the trade deficits.

Now what was we expected this President to do differently that would have resulted in a 1% gain in real GDP growth?

I can think of only one major piece of legislation that inflicted harm on our corporate interests. What's on your list of burdens that the Administration dumped on the corporations which caused economic losses? And what burden did the Administration dump on individuals and households that caused economic losses?

If healthcare is one of the issues you raise, what policy changes or compliance legislation occurred to make those costs to individuals, households, companies, and corporations rise? Healthcare is a growing problem, but it didn't start in 2001.

I am not saying that everything was done as it should have been, but I fail to note how this Administration burdened our nation with additional drains on our economy that were not already in play prior to 2001. I haven't seen that many changes in economic policy.

I look forward to seeing the list of negative legislation and rulemaking from you and everyone else. Make it stick. Seriously.

I don't care if everyone here hates President Bush. That's only a sidebar for me. I want to know what each person knocking the existing economic policies would have done differently and whether such legislation or department/agency rulemaking would have been supported by the Congress...on either side of the isle.

I raise these points because I never hear the specifics from main or comment posters. Bitching isn't enough. Kindly support your points, whatever they are.

If you want to just talk GDP numbers, it's obvious where at least 1 percent GDP growth has gone - offshore. And those intended plans were well in place before 2001. That the offshoring to China and other nations picked up steam should have surprised no one. The floodgates have been pulled way down. What did anyone think would happen?

[anne]

Well, we could have had say health insurance for the 47 million Americans, most of whom are adult and most of whom are working, who do not have health insurance.

Well, we could have a minimum wage higher than $5.15 an hour.

Well, we could have a federal-state revenue sharing plan that would dramatically lower tuition at public colleges.

Well, we could have had tax cuts that were geared to the middle class rather than the wealthiest.

Well, we could be properly protecting workers from mine to agriculture safety programs.

Well, we could be spending the $10 billion a month on the insane occupation of Iraq on American infrastructure, from education to medical and energy and environmental research and development programs.

Well, we could have a Democratic President who would bring American soldiers home from Iraq immediately and pay attention to the needs of Americans.

[anne]

Spencer:

"The long term growth rate of the US economy has been for 3.5% real gdp growth. since bush took office real gdp growth has averaged about 2.5% and we have had only one year of above trend growth.

"Congratulations team Bush -- you have implemented an economic policy that managed to reduced growth to about a full percentage point below trend."

Congratulations team Bush, and remember war and occupation are costless, except for all the horrid costs and except for those who must pay for the costs.

[maria]

MGuy, just a few little points, made as kindly as I can.
Your man is finished, as is his war, as well as his domestic agenda including his "tax cuts". There isn't much else he has done, since the imperialistic stupidity of invading Iraq consummed all his political capital. I might note parenthetically the irony that the little war that he thought would give him the popularity and capital to fascize America turned out to do just the opposite; it has destroyed him politically and made him impotent domestically. And the coming recession will finish him off but good. And as far as what one would have done differently, the best answer I can give is "almost everything."

[anne]

Mark Thoma reminds me that there were Presidents of economic vision for America from Franklin Roosevelt to John Kennedy to Bill Clinton. We have however a President whose vision has still not been so far as to properly foster and support dreams in re-building an essential American city and Gulf Coast region. No matter such lack of vision, we have made sure change is coming.

[anne]

Maria is splendid, bold, precise and correct. "And as far as what one would have done differently, the best answer I can give is 'almost everything.'"

[evagrius]

ISM report;

PMI
The manufacturing economy failed to grow in November as the PMI registered 49.5 percent, a decrease of 1.7 percentage points when compared to October's reading of 51.2 percent. This is the lowest reading since April 2003 (46.5 percent) when the PMI was last below the 50 percent level. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the November PMI indicates that the overall economy is continuing to grow while the manufacturing sector has now entered a period of contraction. "The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (54.1 percent) corresponds to a 4.1 percent increase in real gross domestic product (GDP). In addition, if the PMI for November (49.5 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually."

New Orders
ISM's New Orders Index registered 48.7 percent in November. The index is 3.4 percentage points lower than the 52.1 percent reported in October. November ends a string of 42 consecutive months above 50 percent for this index. A New Orders Index above 51.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars). Five industries reported increases during November: Apparel, Leather & Allied Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Chemical Products.

Production
ISM's Production Index registered 48.5 percent in November, 3.4 percentage points lower than the 51.9 percent reported in October. November's contraction ends 42 consecutive months of growth in the index. An index above 50 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in November, eight registered growth: Apparel, Leather & Allied Products; Plastics & Rubber Products; Primary Metals; Printing & Related Support Activities; Computer & Electronic Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Paper Products.

Employment
ISM's Employment Index registered 49.2 percent in November, a decrease of 1.6 percentage points when compared to October's reading of 50.8 percent. An Employment Index above 48.9 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The six industries reporting growth in employment during November are: Apparel, Leather & Allied Products; Primary Metals; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Paper Products.

Supplier Deliveries
The delivery performance of suppliers to manufacturing organizations was slower for the 41st consecutive month in November. ISM's Supplier Deliveries Index for November registered 52.8 percent, an increase of 2.6 percentage points when compared to October's reading of 50.2 percent. A reading above 50 percent indicates slower deliveries. The eight industries reporting slower supplier deliveries in November are: Computer & Electronic Products; Paper Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Transportation Equipment; Chemical Products; and Machinery.

Inventories
Manufacturers' inventories contracted at a slower rate in November as ISM's Inventories Index registered 49.7 percent, a 0.3 percentage point increase when compared to October's reading of 49.4 percent. An Inventories Index greater than 42.2 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in chained 2000 dollars). The six industries reporting higher inventories in November are: Apparel, Leather & Allied Products; Plastics & Rubber Products; Primary Metals; Food, Beverage & Tobacco Products; Paper Products; and Chemical Products.

Customers' Inventories*
The ISM Customers' Inventories Index registered 50.5 percent in November, which is 1.5 percentage points lower than the 52 percent reported in October. The index indicates that respondents believe their customers have more than sufficient inventories on hand (inventories are too high) at this time. This is the second month of growth following 64 consecutive months in which the index registered below 50 percent. Seven industries reported higher customers' inventories during November: Wood Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Machinery; Fabricated Metal Products; Miscellaneous Manufacturing; and Chemical Products.

Prices*
In November, the ISM Prices Index registered 53.5 percent, indicating manufacturers are paying higher prices on average when compared to October. While 61percent of supply executives reported paying the same prices and 16 percent reported paying lower prices, 23 percent of respondents reported that prices were higher than the preceding month.

A Prices Index above 47.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In November, eight industries reported paying higher prices: Printing & Related Support Activities; Food, Beverage & Tobacco Products; Machinery; Transportation Equipment; Computer & Electronic Products; Furniture & Related Products; Miscellaneous Manufacturing; and Nonmetallic Mineral Products.

Backlog of Orders*
ISM's Backlog of Orders Index registered 46.5 percent, indicating manufacturers' backlogs in November are contracting for the third consecutive month. The index is 2 percentage points higher than the 44.5 percent reported in October. Of the 86 percent of respondents who reported their backlog of orders, 17 percent reported greater backlogs, 24 percent reported smaller backlogs, and 59 percent reported no change from October. The five industries reporting an increase in order backlogs in November are: Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Plastics & Rubber Products; Chemical Products; and Computer & Electronic Products.

New Export Orders
ISM's New Export Orders Index registered 56.9 percent in November, a decrease of 0.9 percentage point when compared to October's index of 57.8 percent. This is the 48th consecutive month of growth in export orders. The 11 industries reporting growth in new export orders in November are: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Transportation Equipment; Computer & Electronic Products; Furniture & Related Products; Paper Products; Fabricated Metal Products; and Chemical Products.

Imports*
Imports of materials by manufacturers grew during November as the Imports Index registered 56.5 percent. The index is 0.5 percentage point lower when compared to October. The 10 industries reporting growth in import activity for November are: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Furniture & Related Products; Computer & Electronic Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Chemical Products; Machinery; and Transportation Equipment.

* The Backlog of Orders, Prices, Customers' Inventories and Imports Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy
Average commitment leadtime for Capital Expenditures decreased 8 days to 111 days. Average leadtime for Production Materials decreased 8 days to 47 days. Average leadtime for Maintenance, Repair and Operating (MRO) supplies increased 1 day to 25 days.

About this Report
The data presented herein is obtained from a survey of manufacturing supply managers based on information they have collected within their respective organizations. ISM makes no representation, other than that stated within this release, regarding the individual company data collection procedures. Use of the data is in the public domain and should be compared to all other economic data sources when used in decision-making.

Data and Method of Presentation
The Manufacturing ISM Report On Business® is based on data compiled from purchasing and supply executives nationwide. Membership of the Manufacturing Business Survey Committee is diversified by NAICS, based on each industry's contribution to gross domestic product (GDP). Manufacturing Business Survey Committee responses are divided into the following NAICS code categories: Food, Beverage & Tobacco Products; Textile Mills; Apparel, Leather & Allied Products; Wood Products; Paper Products; Printing & Related Support Activities; Petroleum & Coal Products; Chemical Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Primary Metals; Fabricated Metal Products; Machinery; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Furniture & Related Products; and Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better and slower for Supplier Deliveries) and the negative economic direction (lower, worse and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. The diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number for those meeting the criteria for seasonal adjustments (PMI, New Orders, Production, Employment, Supplier Deliveries, Inventories and New Export Orders) is then seasonally adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-moveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with varying weights: New Orders – 30%; Production – 25%; Employment – 20%; Supplier Deliveries – 15%; and Inventories – 10%.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI in excess of 42.0 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.0 percent, it is generally declining. The distance from 50 percent or 42.0 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials; Capital Expenditures; and Maintenance, Repair and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. These responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

The Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™. The Institute for Supply Management™, established in 1915, is the largest supply management organization in the world as well as one of the most respected. ISM's mission is to lead the supply management profession through its standards of excellence, research, promotional activities and education. This report has been issued by the association since 1931, except for a four-year interruption during World War II.

The full text version of the Manufacturing ISM Report On Business® is posted on ISM's Web site at www.ism.ws on the first business day of every month after 10:10 a.m. (ET).

The next Manufacturing ISM Report On Business® featuring the December 2006 data will be released at 10:00 a.m. (ET) on Tuesday, January 2, 2007.

[spencer]

John Dewey, Movie Guy -- Actually, I pretty much agree that the President has only a marginal impact on the economy. I put out comments like I do to put things in perspective and counter the right wing spin machine.

We had an investment boom, bubble in the 1990s that grew out of technological developments that had little or nothing to do with fiscal policy. What Rubin-Clinton did was the correct policy of just getting out of the way and letting it happen.

Bush came in with an economy suffering from massive excess capacity. So his policy was to cut taxes to incourage investments. But since we were suffering from excess capapcity it was the wrong policy for the environment. So no wonder it did not work well. The only aspects of the policy that have worked were the Keysenian demand stimulous. the "supply-side" aspects have been a complete failure. What would have been a better policy would have been more Keysenian stimulous, especially of a short term nature.

One byproduct of the investment-technology boom was sharp increases in inequality. Fiscal policy should have been aimed at offsetting some of this massive increase in inequality rather then the actual policy of reinforcing and expacerbating the growth in inequality.

I happen to believe the driving force behind the trade deficit is the savings-investment gap so the causal relationship run from savings shortfalls to capital imports and a trade deficit. During the 1990s almost half of the savings that financed the capital spending boom was from the combination of the federal surplus and foreign capital. So at that point we were using the foreign capital to finance investments that created the productive capacity to service the debt. But now we are using the foreign capital to finance consumption and a housing bubble that does nothing to create future growth to service the debt. We are maxing out our credit cards and living beyond our means. The guys saying it is all OK are like the guy jumping from a skyscraper and as he passes the tenth floor says, see,
everything is fine so far.

One final point John, check your data on the so called post WWII boom. It is more myth then reality.

[evagrius]

Just a question- How much did the increase of credit availability influence the present economy?
Isn't giving credit the same creating money?

[Lafayette]

"Well, we could have a Democratic President who would bring American soldiers home from Iraq immediately and pay attention to the needs of Americans."

Have you thought of the consequences of such an action? Are you thinking at all? The resulting civil war will pit one faction against the other and decimate thousands.

Uncle Sam got himself into this mess ... now he can take the time necessary to get himself out properly. The Iraqis spilt blood to be "liberated" and now that America is tired of its misjudgement, they must spill even more blood? Do you think that human beings deserve that?

The only mentality more thick than the Obtuse Right is the Obtuse Left, especially when it has got a bee in its bonnet.

[spencer]

the four years of gdp growth cited by John Dewey
average 2.8% growth -- that does not seem to really negate my point that the Bush policy has achieved below trend growth.

[calmo]

Point taken spencer and amplified: at what cost was this sub-par perfomance achieved?
National indebtedness, for all but a few, higher personal indebtedness...burdens for future generations.
Environmental degradation in the face of evidence disputed only by oil companies...burdens for the entire planet.
And more: cultivation of complacency that there is nothing all that bad with merely a sub-par performance...everyone has their bad days...even a bad week...sometimes a bad season..a bad year is not out of the question...face it: the 60s were good compared to this decade.
That slide ("under-reaching") seems more commonplace than marching/demonstrating and insisting on better performance (criticized by those opposed to oversight bodies as "over-reach").
Sorta

[anne]

Spencer:

"We had an investment boom, bubble in the 1990s that grew out of technological developments that had little or nothing to do with fiscal policy."

We had an investment boom in the 1990s that grew out of a bold tax increase by the Clinton Administration that set us on course for dramatic deficit reduction and allowed for more accomodating Federal Reserve policy and lower interest rates. Yes; fiscal policy by the Clinton Administration allowed for an investment boom and fine growth.

[anne]

Also, we are spending about 50% more in real terms on Iraq than we spent on Vietnam and even though the percent of GNP that is being spent on Iraq is significantly lower than the percent of GNP spent on Vietnam the spending in still vast but it is has not had the stimulus effect that might be expected.

However, the insane material cost of Iraq in all will in time be $2 trillion and there should not be an essay dealing with fiscal policy and debt that does not raise this issue.

[maria]

"Uncle Sam got himself into this mess ... now he can take the time necessary to get himself out properly. The Iraqis spilt blood to be "liberated" and now that America is tired of its misjudgement, they must spill even more blood?"

On what possible grounds do you think Uncle Sam can "get himself out properly?" Every move he makes in Iraq compounds the mess he created. The blood now being spilled is being spilled with Uncle Sam right there. Staying there won't stop the blood being spilled, while getting out might well have the effect of removing one of the main reasons for the violence. Your argument is simply a dishonest excuse to continue the occupation and consolidate our imperial colony in the region.

[anne]

Maria is overwhelming:

"On what possible grounds do you think Uncle Sam can 'get himself out properly?' Every move he makes in Iraq compounds the mess he created. The blood now being spilled is being spilled with Uncle Sam right there. Staying there won't stop the blood being spilled, while getting out might well have the effect of removing one of the main reasons for the violence."

[Feaoce]

Methinks the Rich/everyone else gap will widen irretrievably if lower rates don't forestall the slow-motion housing trainwreck. But Ben can't lower rates, he needs to defend the dollar (some Street firms are calling the next move a hike). The long-term adjustment of capital flows called for by Stephen Roach will never come, the US$ can't afford to lose premier currency status.

Job creation to get us back to recession-recovery averages needs to be 400k per month, what are we averaging, about 150k?

So the gulf will widen until it is in China's best interest to revalue the renimbi. Then all holy-toothpicks erupts. No solutions here, just the first multi-quarter recession since '80-'81.

[anne]

Before the war in Iraq, Paul Krugman argued that we would have to occupy Iraq if we went to war. Krugman opposed the war. After the government in Iraq was deposed, there was almost no voice raised against occupation even from those who had opposed the war. I was told repeatedly that we had an obligation to occupy Iraq, and of course we did so to the extent of appointing a governing "Viceroy." There was almost no voice to my remembrance raised on the lunacy of America appointing a Viceroy to bring democracy to Iraq.

From the beginning however I was afraid that occupation of Iraq would engender fierce opposition and be a strategic and moral blunder. What am I to think hundreds of thousands of deaths and who can ever say how many wounded later?

[anne]

Thomas Friedman wanted war war war. Paul Krugman wanted no war. Both wanted occuptation, only occupation done right. Friedman only regrets we were not steel-fisted enough. A loved student, a Marine officer, came to visit and he drove to the country to show off what four-wheel drive was about. Bouncing around, he told me that the Marines were "trained to break things and kill people" and that occupation was impossible though occupation was what he was about. I want an end, immediately. I do not know, what then? I want us to leave Iraq.

[anne]

Also, Maria and Paul Krugman and Nouriel Roubini are rightfully worried about the economy, but....

Scanning Vanguard numbers gives me all sorts of ideas, though as Steve Hsu reminds me nothing gives us more ideas than reading, and I have noticed investment patterns becoming increasingly conservative, but I am also noticing how robust commercial real estate activity is. If we avoid recession, I will attribute this largely to commercial real estate. I have watched just this avoidance of recession from the Netherlands to Australia in the last several years as housing has slowed dramatically. Floyd Norris remarks on just this effect in the New York Times today.

Vanguard indexes and managed funds that parallel indexes, are useful economic, not to mention investment indicators.

[anne]

http://www.nytimes.com/2006/12/02/business/02charts.html?ex=1322715600&en=c22bb4d19d5a8aff&ei=5090&partner=rssuserland&emc=rss

December 2, 2006

There's Spending, and Then There's Spending
By FLOYD NORRIS

THEY are not building homes at the pace they once did in the United States, but they are building stores and office buildings. And while car sales are weak, sales of other things are holding up quite well.

The American economy has so far managed to withstand the housing slump, and statistics released by the government this week showed that one reason is that construction crews have found other things to do.

In the third quarter of this year, spending on residential construction was 5 percent below what it had been a year earlier. It was the first year-over-year decline since 1995 and the largest drop since 1991, when the economy was coming out of a recession. The figures are based on actual spending, at seasonally adjusted annual rates, not adjusted for inflation.

That decline follows one of the strongest periods ever for the housing construction business. Spending had been up by more than 10 percent, year over year, for 13 consecutive quarters, through the first quarter of this year. The only longer streak, of 14 quarters, ended in early 1979, a year before the economy fell into recession.

But as can be seen from the charts, nonresidential construction spending in the third quarter was 27 percent higher than a year earlier. That was the fastest rate of gain in a quarter-century....

[anne]

When the Vanguard real estate investment trust index is up 37.7%, whether over valued or no, I pay attention though I've been paying attention for years. Housing specialist tell me the index is of little use; possibly not however.

[Isabel]

I like this use of the future tense:

"The resulting civil war will pit one faction against the other and decimate thousands."

[anne]

Isabel, the translator, teaches me how to read closely.

says...

Read closely we should indeed. This widespread rhetorical trick is designed to subtly change our perception and make us believe that the situation is not yet that bad. Ever since the occupation began, those who protested it were met with dire predictions about bad things to happen if the US were to leave. By now, with the occupation ongoing, things are happening far worse than anything predicted one or two years ago. That fact hasn't reached much attention. Still o so in denial.

"Well, we could have a Democratic President who would bring American soldiers home from Iraq immediately and pay attention to the needs of Americans." Does that sound as if the current president had paid too much attention to the needs of foreigners? Read closely and write carefully.

George mcGovern's and William Polk's plan to get out of this war (http://www.harpers.org/TheWayOutOfWar.html) is based on a simple principle: admit the mistakes and do what can be done to repair the damage. Nothing can be made undone but I think this plan the only plausible strategy for limiting further damage: to Iraq, to the US, to the world.

[piglet]

.

[cm]

Lafayette: As far as I can see, there was no "clear and present danger" justifying an Iraq invasion as a credible proactively-defensive action. Even when extending considerable benefit of doubt to various parties involved and presuming many acted in good faith, the "evidence" was broadly considered specious, and not conforming to any reasonable standard of evidence required to justify hostilities. And that not just in hindsight, but right then.

I don't think that pulling out US troops alone would cut it. This requires an international effort fixing what can be fixed, and the profiteers of the action paying for the remedy.

[Isabel]

Of course, there is the problem of Iran, or maybe more broadly the shiite, filling in the void, but that should have been obvious and taken into account from the begining (literally, Lafayette, "il ne faut pas sortir de Saint-Cyr"). That kind of upsetting of the regional balance is, in my opinion, worth some pause, not a future civil war that has been going on for a couple of months already. On the other hand, I don't see what these people will be able to do with that pause.

[mrrunangun]

From the McGovern-Polk article in Harpers:
"To this end, we think that the Iraqi government would be wise to request the temporary services of an international stabilization force to police the country during and immediately after the period of American withdrawal. Such a force should itself have a firm date fixed for its removal. Our estimate is that Iraq would need this force for no more than two years after the American withdrawal is complete. During this period, the force could be slowly but steadily cut back in both personnel and deployment. Its purpose would be limited to activities aimed at enhancing public security. Consequently, the armament of this police force should be restricted. It would have no need for tanks or artillery or offensive aircraft but only light equipment. It would not attempt, as have American troops, to battle the insurgents. Indeed, after the withdrawal of American troops, as well as British regular troops and mercenary forces, the insurgency, which was aimed at achieving that objective, would almost immediately begin to lose public support. Insurgent gunmen would either put down their weapons or become publicly identified as outlaws."
This is fatuous top to bottom. Who will be willing to supply the troops of this nonAmerican international force pray tell? Public support is not necessary for the attaining and maintaining of power in a situation where power flows from the gun barrel and not from democratic elections. To be an outlaw is no disadvantage when there is no effective law enforcement. Quite the contrary.

[calmo]

On a cost basis, mrunanugunagunanagun, is this proposal cheaper than the current cost of liberating Iraq? The US tax-payer is somewhat desentitized to the cost so far (although the falling dollar may redress that somewhat) compared to his Allies (which always includes Poland, but may not soon include Mexico!), but may be delighted to shed/share this cost with anybody soon enough.
Thank you for reminding me of H. L. Hart and the rule of law backed by force.
So sobering, now.

[mrrunangun]

What will be the cost to future American taxpayers and soldiers from demonstrating that America is a harmless enemy and a treacherous friend? The popular assumption is that the simple presence of our troops is the problem, but it may be that the other side's sensing victory in our irresolution that is what is bringing recruits on to what looks like a winning team. We have picked a fight in Iraq but have shown that we are unwilling to throw a hard punch. On the street that is a recipe for an ass kicking and we are getting one.

[calmo]

Recall our losses 300,000?
But U B right, some ass-kicking and although there may be some who quibble with this analogy to a street fight with punches, I do believe you are correct that this is how it is marketed with 'cut and run' lines.
I think this bitWe have picked a fight in Iraq... goes beyond those lines ("bringing democracy to Iraq", "defending the world against Terrorism," "removing the threat of WMD from Hussein"...) and is closer to the truth: exercising a military capacity with astounding results.