Relevant and even prescient commentary on news, politics and the economy.

Lou Dobbs Smackdown

Julian Sanchez administers a nice one, along with a solid argument for free trade, here. My favorite part comes at the end:

When it comes to trade, Dobbs’ one-sidedness gets things even more dramatically backwards. I had always been under the naive impression that we have jobs in order to be able to buy the stuff that we want. Whether I consider my salary “low” or “high” then depends on how expensive that stuff is. Dobbs, apparently, is inspired by a more Puritan work ethic. On his account, we want jobs for their own sake; if other people are willing to offer us goods more cheaply than we can make them ourselves, this cruelly robs us of the opportunity to work longer and harder.

Dobbs, of course, is an educated fellow, and presumably familiar with these arguments. But providing a voice for those eager to blame a Dark Other for the world’s ills can only be good for ratings. And that, at least, ensures that Lou gets to keep his job.

Sanchez is a noted Libertarian. As I argued before, Libertarians stand to get a lot more of what they want — or at least a lot less of what they don’t like — by supporting the Democratic candidate in 2004. This is probably more important than it sounds at first glance. First, Libertarian votes for the Democratic candidate will likely come mostly from votes that would otherwise go Republican, as opposed to coming from non-voters, so their impact is doubled (see this earler Sanchez editorial on this point). Second, Libertarian support might help convince moderate center-right Republicans who are distrustful of the current administration’s fundamentalist base and growth of government policies to vote for a centrist Democrat, which the primary winner will surely be (yes, I include Dean in this category).

AB

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Krugman on The Summer Boom

Kash goes a long way towards explaining the summer boom in the previous post, and he makes a good case that it’s likely to be revised down toward a still-meaty 6%. Here’s Krugman’s take from today’s NYT:

…This time around growth has a much better foundation: final demand — demand excluding changes in inventories — actually grew even faster than G.D.P. So it’s unlikely that growth will drop off as sharply as it did back then.

But — you knew there would be a but — there are still some reasons to wonder whether the economy has really turned the corner.

First, while there was a significant pickup in business investment, the bulk of last quarter’s growth came from a huge surge in consumer spending, with a further boost from housing. These components of spending stayed strong even when the economy was weak, so there shouldn’t have been any pent-up demand. Yet housing grew at a 20 percent rate, while spending on consumer durables (that’s stuff like cars and TV sets) — which last year grew three times as fast as the economy — rose at an incredible 27 percent rate last quarter.

This can’t go on — in the long run, consumer spending can’t outpace the growth in consumer income. Stephen Roach of Morgan Stanley has suggested, plausibly, that much of last quarter’s consumer splurge was “borrowed” from the future: consumers took advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later. If he’s right, we’ll see below-normal purchases and slower growth in the months ahead.

[snip]

Still, it’s possible that we really have reached a turning point. If so, does it validate the Bush economic program? Well, no.

Stimulating the economy in the short run is supposed to be easy, as long as you don’t worry about how much debt you run up in the process. As William Gale of the Brookings Institution puts it, “Almost any tax cut or spending increase would succeed in boosting a sluggish economy if the Federal Reserve Board follows an accommodative monetary policy. . . . The key question is, therefore, not whether the proposals provide any short-term stimulus, but whether they are the most effective way to provide stimulus.” Mr. Gale doesn’t think the Bush tax cuts meet that criterion, and neither do I.

To put it more bluntly: it would be quite a trick to run the biggest budget deficit in the history of the planet, and still end a presidential term with fewer jobs than when you started. And despite yesterday’s good news, that’s a trick President Bush still seems likely to pull off.

AB

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Explaining the GDP Boom

Further insight into yesterday’s big GDP numbers was provided by the release this morning of the September personal income and spending data by the BEA. Both income and spending were sharply lower in September compared to August. The reason? Overwhelmingly, it was because of the end of the one-time tax rebates sent out over the summer. In the graph below, you can see the big bump in both disposable income and consumer spending in July and August, which was almost entirely due to the tax rebates.

What does this mean? Three things.

First: this provides strong evidence that the huge increase in GDP last quarter, which was powered largely by consumer spending, was largely due to the tax cut. Good old fashioned Keynesianism, as AB pointed out. The mortgage refinancing boom helped some, too, but the lion’s share of the credit goes to the tax cuts.

Second: this suggests that last quarter’s GDP figures were an aberration. The fourth quarter will most likely not be nearly as good, since the tax rebates have now been spent and their impact on the economy is pretty much gone. So expect GDP growth to slow.

Third: we can also expect the third quarter GDP growth figure of 7.2% to be revised downward when the updated estimate is released on November 25. The advance figures, which we got yesterday, are mostly based on July and August economic activity. The revisions will take September more into account, and thus will be lower. When all is said and done, we may well find that 3Q GDP growth was around 6%.

One last point about yesterday’s GDP report. Don’t spend too much time looking for a downside to it. Even if it’s only 6%, it’s a genuinely good report. The economy is indeed slowly improving (though there are reasons why I think the economy will slow down again in another 6-12 months). Those are real gains, which we can’t ignore, as much as we want to see W. crash and burn. The important question to ask about the economy’s growth is whether it’s sustainable. As this post indicates, I tend to think that it’s not.

Regardless, I think that AB is right that the Democrats shouldn’t be putting all of their hopes on a poor economy giving them the election next year. The economy won’t be great, but it won’t be terrible, either. With each passing week, it becomes more clear to me that the way to beat Bush is with his disastrous foreign policy, his secrecy, and his lies.

Kash

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It’s not my fault, unless the issue is GDP growth, in which case I get all the credit

As evidenced by this week’s flap over the Navy forcing the White House to put up the Mission Accomplished sign, this administration is great at buck-passing (Tresy at corrente has an excellent summary). But that only applies to bad news.

Today, CNN has a story headlined, “Bush claims credit for third-quarter boom”:

“That’s [the 7.2%] the fastest growth we’ve had in nearly 20 years,” Bush said in a speech before workers at Central Aluminum Co., in Columbus. “Exports are expanding, investment is rising, housing construction is growing. The tax relief we passed is working.”

Now Bush is right that that’s a big number (even Kash agrees). But at least since the time of Keynes, we’ve known that a massive expansion in net government expenditures (i.e., spending increases and tax cuts) will lead to a short run boom. So it’s a bit of a surprise that jobs haven’t improved yet, and it’s possible that they still will (Democrats be warned: focusing all your criticism on the jobs picture may be risky). Still, this surge is pure-Keynesianism demand-side stimulus, which can be good in the short run, but carries long-run risks (inflation, mostly) that a macroeconomist (Kash? Brad?) can speak to better than I can.

AB

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Kudos to Republican Senators

I’ll give Sen. Pat Roberts, who until now has seemed basically like a White House shill, a little credit for this:

To Tenet, the senators wrote, “You must expedite our access to the current list of outstanding documents and interview requests.”

“This information was to have been provided to the committee five months ago,” they wrote.

The senators’ letter also complained about the failure of the agency to provide the committee “with an explanation of the various disconnects and inconsistencies in the assessments concerning the Niger uranium issue.”

In the letter to Rice the senators wrote, “We have made numerous requests for documents which we have not yet been provided and we have sought to interview a member of your staff without success. Some of these requests have gone unanswered since July. You must expedite our access to the outstanding documents and immediately make available the individual identified. You must also lift your objection to the Central Intelligence Agency providing the committee with certain documents and allowing us to interview individuals involved in briefing senior administration officials.”

To Rumsfeld and Powell, the two senators wrote, “The credibility of the government with its people and the nation with the world is at stake. Incomplete answers and lingering doubts will haunt us for many years.”

The story also says that “Officials said Tenet is willing — indeed eager — to appear before the committee and explain why, before the war, U.S. intelligence said Iraq had weapons of mass destruction.” Now that would be interesting to see.

While I’m giving out credit to Republicans, John Warner deserves some for urging Gen. Boykin to step down (as undersecretary of defense for intelligence, not his rank). Still though, it’s a bit annoying that most stories on Boykin’s remarks, including the one just cited, don’t contain his actual statement, much less this disconcerting detail:

Martin reports Boykin has shown church groups photos he took of Mogadishu with black slashes in the sky which he says did not come from any defect in the camera or film.

“Whether you understand it or not, it is a demonic spirit over the city of Mogadishu. Ladies and gentlemen, that’s not a fake, that’s not a farce,” Boykin said.

In college, we used to maintain a “Satan Watch”, which was basically a collection of photos from The Enquirer and other tabloids purporting to show the face of Satan in the clouds, or the smoke enveloping a burning building. Little did we suspect that that qualified us to be an Defense undersectretary.

AB

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Best Take Yet on the Stalker

I’m sure most of you have seen that self-proclaimed poor, stupid, and Krugman-stalking Don Luskin had his lawyer send a letter to Atrios demanding that Atrios remove a post that (accurately) mocked Luskin, and that the accompanying comments also be removed. I don’t have much to add on this; Luskin is both clearly an idiot and clearly wrong.

The Poor Man, however, has the best take yet on this. Go read it.

AB

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Up is Down

Here at Angry Bear, when we make reference to “up is down” or “down is up,” we’re usually referring to some new Orwellian step by the administration (seriously, Karl, 1984 was a warning, not an instruction manual).

This morning, Kash showed how “… the BLS has magically discovered a way for jobless claims to drop week after week, without the number of jobless claims ever actually falling.” When I first read that, I thought to myself, “hey, that defies logic.” But my confusion was due to a lack of vision, as demonstrated by this illustration that reader Jason G. sent me today:

AB

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The Daily Show

Thursday night:

JOHN: Isn’t a mistake for the President to blame the Navy for hanging the “mission accomplished” sign up there.

ROB:Absolutely not, John. The President didn’t even want it up there at all. But, as you know, he’s got no control over the Navy.

JOHN: Rob, he’s the Commander in Chief, he’s got complete control of the Navy.

ROB: Yeah, the regular Navy. Yes. But not the elite Sign Hanging Units. Those guys are cold-blooded sign-hangers, John. Put a sign out there and they’ll hang it whether you like it or not.

AB

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Treasury’s Nonsense about China’s Exchange Rate

The Treasury Department issued their annual report this morning examining whether any countries are using their exchange rates to unfairly take advantage of the US. Unsurprisingly, the report discusses the politically important issue of China’s exchange rate vis-à-vis the US in some detail. (If you want some background on the China exchange rate issue, go to earlier posts here and here.) The report contains some rather disingenuous tidbits.

China has pegged its currency since 1994 at 8.28 to the dollar. This policy is not appropriate for a major economy like China and should be changed.

I’m slightly puzzled as to why a fixed exchange rate is no longer “appropriate” for a major economy. Depending on the situation, there can be perfectly good reasons to have a fixed exchange rate, just as there are sometimes perfectly good reasons to have a flexible exchange rate. It’s interesting to note that the US had a fixed exchange rate with its largest trading partner through most of the 19th century, and again during the period of remarkable economic growth from 1945-1970. Here’s a helpful graph:

The bits on the graph that are essentially flat represent periods when the US had a fixed exchange rate. Judging by how long the fixed exchange rate was maintained and how much the US economy grew during those periods, a reasonable conclusion is that fixed exchange rates worked pretty well for the US during its development.

Another bit of misdirection contained in the report is this:

Greater exchange rate flexibility would also allow China greater scope to maintain a low-inflation, pro-growth monetary policy.

I’d be very curious to know why they think that China needs a flexible exchange rate in order to achieve low inflation and high growth. Over the last 3 years China’s GDP growth has averaged about 7% per year. It’s inflation rate has averaged about 0%. Does China really need help achieving high growth with low inflation?

There may well be some valid reasons that China should change its peg, but let’s be honest here. The reasons contained in this Treasury report are nonsense.

Kash

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