Sunday, September 21, 2008

The Fundamentals of Our Economy

John McCain said, infamously, “the fundamentals of our economy are strong”, then, when people mocked the ridiculousness of that statement, tried to do a dance about how he meant how wonderful our workers were. Of course, every time McCain opens his mouth on the economy, he immediately puts his foot in it, most recently by declaring he wouldn’t bail out AIG a day before the Bush Administration decided to do just that, forcing him to back off that stance. As McCain said months ago, he is not “well-versed” on the economy. Which is a pretty amazing admission, considering that he was the Chariman of Senate Commerce Committee – you know, commerce, like buying and selling stuff. So apparently the GOP cared so little about government oversight of the economy that they made an economic ignoramus chairman of the committee responsible for that job -- and Johnny did a heck of a job.
What are the fundamentals of our economy? Why do some people you see on CNBC and FOX Business say things like McCain did?

The plusses of our economy:
GDP is high and growing, albeit slowly
Productivity is high
It’s really big, therefore we export a lot of stuff and exports are growing, thanks to a weakening dollar
Like AIG, we’re too big to fail

The minuses of our economy:
Negative balance of payments
Huge budget deficits
Mounting national debt
The lowest savings rate in the developed world
Mounting personal debt
A pension and health time bomb set to explode in the next decade or so
Rapidly rising inflation
A banking system in disarray

Most of the plusses are less than thrilling, although if all you focus on is the stock market and the profitability of American businesses you own stock in, you could be pleased by the economy. As long as people can afford to buy beer, the McCain family will be able to own six houses and 13 cars.
The minuses have been building for years. The tech bubble of the nineties masked a long-term decline that has finally come to a major disaster following eight years of corporatist government based on the theory that the government should do nothing but help the rich and that bigger is better. The negative balance of payments has been rolling for decades. We import more than we export and in the long run, that is not a sustainable thing to do. How long a run it takes is hard to say with an economy our size. If someone who has $10,000 in savings spend $1,000 more than he earns each year, he’ll be introuble pretty fast. If someone with a million in the bank spends $10,000 more per year, he won’t live long enough to worry about it. The budget deficits started in the Reagan years, took eight years off based on the tech bubble and the increase in the top tax rate and relatively high capital gains taxes during the Clinton years, and exploded under the profligate spending and ludicrous tax policies of the Bushistas.
Regarding the last two, during the Reagan years, when previously unthinkable budget deficits were mounting, the right-wing economists came up with a new theory to explain why they weren’t really so bad – they considered the deficits as a percentage of GDP. It’s an interesting concept, which sort of worked when the Clinton years, coupled with the dreaded tax increases, evened up the books. In theory, a steadily growing economy should, in good times, take in the money needed to catch up with earlier deficits. That is, unless Republicans are in charge and cut taxes in good times and keep them low. This is economic stupidity of the highest magnitude, as tax cuts should be used as a stimulus and if they are always low, then you can’t cut them when needed. Of course, that is merely logic, and Republicans are averse to that sort of thing. As for the balance of payments, this country has been reluctant to even think about what they mean, for fear of reconsidering the concept of free trade being the most wonderful thing in the world. One thing logic tells us – you spend more than you earn and you get poorer. It may be significantly poorer, it may be insignificantly poorer, your quality of life may be temporarily better by having what you bought, but eventually someone has to address the idea of whether this is sustainable. No one ever has and I doubt anyone ever will.
The savings rate and the personal debt sort of go together. The housing bubble did a nice job of masking that, as people borrowed money on their ever-increasing home values to keep their lifestyle rolling along. We see how wonderfully that worked out. It is nearly impossible to fix this problem. Let me repeat that: it is nearly impossible to fix this problem. I apologize for the “nearly”, but I am reticent to use absolutes on economic issues. Our economy has been consumer-driven for a long time. If Americans start saving the way Asians or Europeans do, not only will our economy tank, the world economy could go with it, as U.S. spending has been the fuel for their economies as well. The problem is that many individuals are running out of money and running out of credit and that is scary.
I’ll skip the pension and health time bomb, we all know it is coming. One thing: many of us have been less worried about it because the economic assumptions which led to people thinking Social Security was going broke were based on extremely conservative growth numbers. They were always much lower than actual growth numbers and many of us felt that if those numbers turned out to be true, then Social Security was the least of our problems. They seem to be coming true and, indeed, Social Security is the least of our problems.
Inflation is a disaster for most Americans. Don’t believe the official numbers, food prices and fuel prices, the things you have to have to exist, are exploding. For people on fixed incomes, for people living paycheck to paycheck, this is a nightmare. Again, it isn’t a problem for Bush or McCain, so don’t look for the Republicans to worry about it.
The collapse of the financial sector has been in the news a lot, so you can read about that other places, although I’ll talk some about it next week. It has brought about the most startling political decision in American history, with a form of economic fascism being proposed by a Republican administration.
The fundamentals of our economy are not sound. The economic minister of India has suggested the IMF take control of the U.S. economy, as it does for other countries which have demonstrated no ability to manage it. Perhaps he’s right, for we are headed for bad times in any case, and the rest of the world needs to make sure they don’t go along with us.

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Blogger Sam said...

It is hard to argue with anything you've written. The fundamentals of our economy are not sound. The strength of the stock market reflects profits generated by international companies in markets other than the U.S. In order for house values and house building to continue to increase, there must be buyers making more money who are able to afford those homes and all of the evidence suggests that, for the vast majority of Americans, incomes are not going up; in fact they are remaining relatively steady while costs are going up. Clearly, far more homes and apartments were built in the past 7-8 years than there were/are families able to afford them and now we have investment and commercial banks with "assets" on their books that may become Monopoly money. The one area where I would take exception is the suggestion that free trade has contributed to our demise. In fact, free trade has been been a net benefit to our economy by keeping inflation low and creating export related jobs. The canard, first offered by Ross Perot, that NAFTA and the WTO were the cause of factories closing and jobs moving off-shore is a tragic lie. Until one correctly identifies the cause of the problem, one can't attempt to correct it. Still, the U.S. economy is in bad shape. Tom Friedman recognized this 4 years ago and little has been done to seek long term solutions.

1:44 PM  
Blogger Barry Rubinowitz said...

Free trade has pluses, free trade has minuses. To ignore the minuses is merely a dogmatic belief in the face of all evidence. The problem with analyzing free trade is that its proponents love to conflate the effects of trade with Europe, Japan, and Canada, with trade with China, India, and Mexico. That is disingenuous at best.
There is no evidence that trade withe the latter countries has been good for wages, benefits, or the economy as a whole.
I do not believe there is an easy, or even a difficult solution to this problem, but I do not buy the free trade lies and would like the next President to understand the damage that is done to jobs, wages, and our balance of trade by universal free trade so that its disastrous effects can be ameliorated somewhat. As for inflation -- we are undergoing some of the worst inflation I can remember at the moment, so this is hardly a positive which can be claimed.

11:03 AM  

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