The staying power of an odd recession

The first President George Bush won the first Gulf War. A year later he lost the presidency because the economy was in the tank. Will the second George Bush suffer the same fate? There is one big difference that should work in his favour. The first Bush's recession started after the first Gulf War, while the second Bush's recession started before the second Gulf War. But the nature of this recession may remove the advantage.

With recessions, timing usually makes all the difference. Recessions typically last about a year and a half. That is why presidents like to have them early in their first term. They get it over with, so by the time re-election day rolls around economic indicators are pointing upwards. If the recession that began in 2001 followed the typical pattern, it would be over by now, and President George W. Bush would be in good shape for re-election in 19 months' time.

What makes the White House nervous is that the current recession is far from being over. Indeed, the US economy continues to lose jobs at a remarkable rate. The last two monthly job reports, for February and March, show a combined loss of almost half a million jobs. So far, this recession has spawned the longest continuous decline in jobs in half a century.

From the beginning, the 2001 recession broke the rules. Most US recessions start when the Federal Reserve Board raises interest rates to cool an overheated economy. Then consumers put a brake on spending because they cannot afford to borrow more money. This is what happened to the first President Bush. Alan Greenspan and company in effect did him in. But the Fed did not start the 2001 recession. This one began when corporations stopped buying capital goods and the technology bubble burst. In fact, Greenspan and company have cut interest rates 12 times, to their lowest level in decades. Yet this curious recession goes on.

Even though corporations still have not resumed spending, American consumers have kept buying. But there is a limit to how much consumers can spend when their jobs are disappearing and their pay cheques are under stress. The White House's worry is that consumers are now deep in debt. They were already in a hole when the recession started, but the hole is now so deep that many cannot climb out.

Low interest rates have made it easy for many cash-strapped consumers to borrow against their homes. Last year, American homeowners raised $130bn through home-equity loans, nearly double the amount they borrowed in 2001. So far this year, the home-equity borrowing binge continues. Homeowners are using the cash to buy all sorts of things they otherwise would not be able to afford - appliances, home repairs, new or used cars. But mainly they are using it to pay down mounting credit-card debt. That is smart. Interest rates on home-equity loans are only about half those on credit-card debt, and home-equity interest payments can be deducted from income taxes while interest on credit-card debt cannot.

As long as home values keep rising, borrowers are protected against a cash crunch. If they cannot make a payment, they can always take out another loan against the rising value of their home. But here is the catch. When interest rates start heading up again, housing values will stop rising and may even go down. Mortgages will become more expensive, which means fewer people in the market to buy a home. So many new homes are now being built, that some housing markets are already facing a glut. Home prices are now softening in Oklahoma, North Carolina, Indiana, Ohio, and the state of Washington.

Why would interest rates rise? Because America as a whole is deep in debt. The federal budget will have a deficit of more than $300bn this year and another $300bn next year. Over the next 10 years, the federal deficit is expected to top $1,500bn. If the president's proposed $730bn tax cut is enacted, the sum will be larger still. Huge deficits push up long-term interest rates because lenders naturally assume that they will lead to inflation.

Meanwhile, the US continues to import far more than it exports, resulting in a widening trade gap that has been financed by foreigners lending us money and buying up US assets. Total foreign debt now totals about $3,000bn. So it is no surprise that the dollar has been weakening relative to foreign currencies. A weaker dollar also fuels inflation, because everything the US buys from abroad costs more. And inflation fuels rising interest rates.

So what happens to an economy with continuing job losses, high consumer debt, and a weakening dollar? It does not rebound any time soon. Indeed, there is a significant possibility that it will not do so before the next presidential election in November 2004.

The first President Bush won the first Gulf War but lost the subsequent election because, by election day, the first thing on the minds of most Americans was the economy, stupid. Political strategists for George W. Bush have reason to worry that history may repeat itself.

The writer is University Professor of social and economic policy at Brandeis University. He was secretary of labour under President Bill Clinton and is author of "I'll Be Short: Essentials for a Decent Working Society"

#1. There was NOT A RECESSION under Bush One. Clinton's own advisors quietly revised the numbers upward after the election. Even without the revision, there were no two consecutive quarters of negative growth, the classical definition of a recession!!! In fact, there was not even a single quarter of negative growth.

#2. Bush One was NOT the worst economy in 20 years, that honor was all Jimmy Carter's, and was conveniently forgotton by candidate Bill Clinton.

#3. THERE IS NO RECESSION NOW!!!!!!!!!!!!!!! Again, by the classical, accepted definition of a recession, we are NOT in a recession. There have been no quarters of negative growth under Bush Two.

The democrats love to call this a recession, by repeating this lie, they are hoping it will be accepted as truth!

See my article below:

Setting the Record Straight on the Bush Economies

Recent editorials in the Express News have assailed the economic records of both Bush administrations. The mantras “Bush Tax Cuts for the Rich” along with its predecessor “It’s the Economy, Stupid” and have something in common: They don’t survive scrutiny against objective data. Those who repeat these mantras seem to hope that repetition will somehow make these distortions become true. Facts prove otherwise.

When Bill Clinton used the phrase “It’s the Economy, Stupid”, he certainly had his target audience clearly identified. When the smooth-talking Democrat from Arkansas declared the Bush economy was “the worst economy in 20 years” he was basing it on preliminary economic data from the Bush administration itself, which showed a minor downturn, not a major downward trend, in the economy. Candidate Clinton also conveniently forgot to mention the Carter administration, which truly was the worst economy in 20 years. Once elected, Clinton’s own economic team quietly revised the Bush economic data upward to reflect that the economy never actually stopped growing during this “worst economy in 20 years”. The historic record of United States Gross National Product Data (Source: Department of Commerce, Bureau of Economic Activity) tells the true story--sustained and healthy growth during the first Bush presidency.

The current mantra of “Bush tax cuts for the rich” similarly cannot withstand illumination by the facts. An examination of taxation rates shows that the Clinton administration was the real friend the rich, which is reinforced by the fact that the divide between rich and poor grew during the Clinton presidency. The truth is that the Clinton “economic miracle” was accomplished on the backs of the poor. The tax tables do not lie--the poorest taxpayers paid 50% more in taxes under Clinton than under the Bush plan, while the richest taxpayers paid less than 10% more. A look at the facts further reveals that Bush’s “tax cuts for the rich” actually shift more of the tax burden to the richest taxpayers and provide the greatest tax relief to the poorest.

A recent editorial lambastes the Bush administration on eliminating double taxation on corporate dividends. Dividends are currently taxed at the corporate level, as well as at the individual investor level. Wall Street has enthusiastically welcomed these changes, and even some enlightened Democrats support it. A tax cut for the rich? No. Nearly one in three Americans is invested in the stock market. The small investor, which includes many retirees and pensioners, would see the greatest percentage increase in wealth from the elimination of this tax. Yes, the rich have borne the brunt of this unjust double tax, but that does rationalize keeping it.

As for the economy’s performance under Bush, the Democrats had better not be too loose with their criticism, the facts may get in the way. Here’s a little secret they don’t want you to know: The economy has experienced positive growth during every single quarter of both Bush administrations, interest rates are currently at a twenty year low, taxes are lower for all - with the poorest taxpayers benefiting the most, and unfair double taxation which discourages investment is being eliminated.

The Bush critics hope that screaming their hollow mantras will somehow drown out the truth. We’re not “Stupid” this time.

Friedman observed that only when consumers got what they considered a permanent income rise, such as through a job promotion, did they raise their consumption. It follows from this that only permanent tax cuts, which permanently raise disposable income, will have any meaningful impact on consumption. This insight is one of the reasons why Friedman was awarded the Nobel Prize in economics in 1976.

snip

Only permanent tax rate reductions, such as those proposed by Bush, will actually raise consumption and growth. It follows from this that any kind of trigger mechanism on the tax cut is counterproductive. That would transform any supposedly permanent tax cut into a temporary one, thus sharply reducing its stimulative impact on the economy.

This may sound like ancient history, but many key government officials today remember it well. Vice President Dick Cheney was Ford's chief of staff, Federal Reserve Chairman Alan Greenspan was his Council of Economic Advisers chairman, and Treasury Secretary Paul O'Neill was deputy director of the Office of Management and Budget. So even if no one else in Washington remembers that tax rebates are not stimulative, they do. They should make sure that those in Congress know, too.

http://www.townhall.com/columnists/brucebartlett/bb20010328.shtml

I'm no economist, but I suspect that the difference between "bump in the road" and "hell in a handbasket' is unemployment.

Significant, long-term unemployment is what turns a recession into a depression. I used to think inflation was the culprit, but now I do not; working people in an inflationary economy still suffer, but as long as they are employed and earning some kind of income the suffering is limited to living lower off the hog while wages catch up to prices. A working man can accept the price of beer or gasoline going up fairly easily as long as he is steadily employed; he simply drives less and drinks less beer. In my household during the inflationary '70s, my folks called this "beans and cornbread" living; since the prices of staples like beans and cornbread remain relatively steady even in times of signficant inflation, survival becomes a matter of doing without luxuries, not necessities. "We'll just have to eat beans and cornbread until things get better."

But long-term unemployment is much more serious. Without income of some kind, even beans and cornbread (and rent and bus fare and laundry money) become luxuries, and doing without them for any length of time leds to misery, despair, and anger. It's becoming increasingly obvious to me that maintaining full employment is much more important than keeping prices low or inflation under control; without steady work, stomachs rumble -- and a man can only see his children go without for so long before he decides to Do Something. (And that "something" can be very serious, indeed.)

A working-class family that is used to doing without can endure periodic joblessness out of experience, living paycheck-to-paycheck and waiting for the next job to come along is par for the course, and low-wage labor is always in demand somewhere. But when long-term unemployment becomes endemic among the middle classes -- skilled artisans, educated technicians, small-practice professionals, and unionized labor -- that's when the real trouble begins.

What's the solution to our growing problem with long-term unemployment? I don't know. Federal jobs programs (WPA style) might be worth considering if the unemployment trend accelerates, but all the federal pump-priming in the world won't stimulate the economy if your workers have nothing to buy -- and at current rates of capital formation, industry is closing down widget factories, not building them.

One could also argue that what we need now is another World War. World War II pulled the U.S. out of the 1930s Depression, after all; total war on a global scale fires the economy as government provides both the capital (federal money) and the market (the military). Factories get built, Rosie the Riveter goes to work; and the products sold are"consumed" in battle, leading to ever-increasing demand. Presto, full employment!

However, the current trend towards automation has affected the military more than any other segment of society; the recent three-week conquest of Iraq is proof that in the future war will be a short, sharp, highly automated affair. There's no more need to build fleets of B-29s to firebomb Tokyo when a few "smart" cruse missiles can take out the Imperial General Staff building. Small groups of soldiers with high-tech battle gear can now perform tasks that would have required D-Day quantites of ships, planes, and men fifty years ago. One can only conclude that even with our current ongoing War on Terror this less-is-more trend will result not in massive growth in war industries but in mass layoffs, as assembly-lines building hundreds of planes are replaced by smaller highly-automated shops building super-accurate, super-survivable unmanned fighters by the dozens. Barring another truly global war (i.e. a war of survival between the United States and the rest of the world combined) or an invasion from space, we cannot hope for another war boom to rekindle the economy.

(And, of course, there's the human misery of a global war to consider.)

So what is to be done? Disciples of Friedman might well argue that a negative income-tax of some sort might be the solution; by simply paying the unemployed to stay home, the government might at least generate purchasing power where none existed before. (But where does the money come from?) Socialists likewise would advocate the insitution of a federally-funded "living wage", where janitors and broom-pushers are granted hourly wages of fifteen dollars an hour to enable them to live like human beings. (This will certainly spark growth in the bathroom-leaning and floor-sweeping automaton industries.)

But is either idea workable? I'm too uneducated to know.

I do know this: long-term unemployment among the former middle classes will lead to social upheaval if not ameliorated. Barring the introduction of Buchananite tarriffs, manufacturing employment will continue to decline until U.S. wages are equalized with those in the rest of the world; ultimately, every job that can be done by a machine or a sweatshop worker will eventually be done by them. (This goes double for non-manufacturing service jobs like software deveopment and systems administration). Service jobs will be lost at an ever increasing pace as American workers are replaced by outsourced foreign labor (agriculture and custodial work), automated service systems (banking, vending, etc.), and online commerce. In fact, the only industries that will not experience a massive drop in hiring are the medical fields (skilled nursing, hospital administration, etc.), creative professionals (artists, musicians -- but not actors!) and, of course, government and law enforcement. In a time of social chaos, policemen have the most secure jobs of all.

If I'm wrong about any of this, I'd welcome some learned correction.

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