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

Will Bernanke be Right Again?

Fed governor Ben Bernanke testified today on Capitol Hill as part of his confirmation process for a full 14 year term. He had some pretty bullish things to say, particularly about the prospect for an improvement in the US labor market. Here are some excerpts from his testimony:

After several false starts, the economy is showing signs of sustained recovery… Particularly encouraging are the signs of revival in capital expenditure by businesses… Although economic forecasting is far from an exact science, private-sector forecasters broadly agree that the economy should grow at nearly a 4 percent rate in 2004. I believe that forecast is plausible, assuming that the revival in business investment remains vigorous.

Until the job market improves, [however,] this recovery will not feel like a recovery to most Americans. A number of factors explain why we have not yet seen net new job creation.

First, we have seen truly remarkable increases in labor productivity, which have permitted firms to meet the increasing demands for their output without hiring additional workers. Second, possibly because of geopolitical and economic uncertainties, it appears that employers have been slower than usual to make commitments to expand their plants, add staff, or add to inventories.

However, in my view, the growth of productivity is likely to slow, at least somewhat, from its recent extraordinary pace, and so it seems very unlikely that firms can continue to meet rapidly rising demands without adding to their capital stocks (as they have already begun to do) and to their workforces.

Thus, given the rate of increase in spending and output that we are now witnessing, a reasonable expectation is that firms will need to add significant numbers of workers within the next several quarters.

I tend to think that Bernanke knows what he is talking about. As I mentioned in an earlier post, I think he’s been right on the mark about the trend of prices in the US. Plus, he’s just a really smart guy and a good economist. Interestingly, he’s also the only left-leaning economist that I can think of that Bush has nominated for anything. So it might be worth keeping his predictions in mind.

Hmm, that’s two non-bearish posts in a row. I’m going to have to do something about that…


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Is the US Heading for Financial Disaster?

Several commentators have been posing that very question recently. The concern is that the US might be heading for a major financial crisis due to increasing debt. For example, in Krugman’s piece in the NYTimes today, he writes

The timing of [economic] crises is hard to predict. But there are warning signs, like big trade and budget deficits and rising debt burdens.

And there’s one thing I can’t help noticing: a third world country with America’s recent numbers — its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world — would definitely be on the watch list.

Similarly, The Economist (subscription required) ran a story recently called “America the Risky?” that reported on the results of a model, developed by economists at Lehman Brothers, designed to predict major financial crises. That model showed that the US was in the danger zone:

The model, called Damocles (as in “sword of”), is an early-warning signal. It puts together ten indicators—from external debt as a percentage of GDP to foreign reserves as a percentage of short-term debt—to assess the overall riskiness of a country, which is expressed as an index.

A reading above 75 indicates that a country has a one-in-three chance of a crisis in the next 12 months; a figure above 100 implies a 50-50 chance.

When Lehman ran America’s economic numbers through Damocles, the outcome was striking. With its rapidly climbing current-account deficit and foreign debt, among other worries, America’s Damocles index is just shy of 75.

So is the US really in danger of facing a severe financial crisis? I think I have to be slightly less bearish than usual in this case, and say probably not.

The US has some serious advantages over any other country in a similar situation. The biggest advantage is that the primary way that the US is borrowing money from the rest of the world is by issuing US government bonds. Those bonds are considered the safest investments in the world, for good reason. It’s impossible for me to imagine that changing anytime in the meaningful future (or at least the next 20 or 30 years, at least). So the US will continue to be able to borrow money from foreign lenders, and thus will be able to avoid a serious international lending crisis.

In addition, unlike most developing countries (such as Mexico in 1994, and Argentina in 2001), the US doesn’t have to worry about currency fluctuations increasing the US’s debt burden. The US will always repay its debt in dollars, which the Fed will ensure continue to exist in adequate quantities to repay international loans.

So, while I think that the US has a host of long-term economic problems facing it, and that the US government’s finances are a dangerous shambles, I disagree with some of the most pessimistic observers about the likelihood of the crisis scenario. The main problem with the government budget deficits is redistributional, in my opinion – it will require much higher taxes on future generations, and redistribute income away from borrowers and to lenders. But those are topics for another day.


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Hey Look!

Not over there, not at Iraq. Look! International trafficking of women! Hey! I said stop looking at Iraq. Look! No, seriously. Look. Over there! No, stop looking at Iraq! There’s a communist dictator in Cuba! Hey! I said Look at Cuba!


NOTE: Yes, in this post I am making light (somewhat) of serious issues, but that’s a far cry from trying, thankfully in vain so far, to exploit them for political gain.

UPDATE: This tactic is related to, but distinct from, the Chewbacca Defense being applied in the Plame affair (if you haven’t seen this from SadlyNo, be sure to read it).

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Are Two Losers Better than One?

Ok, Kerry and Gephardt aren’t really losers, they’re just losing the primary race. One has no chance and the other has a small chance. But they’re hoping not to go down alone:

These two presidential contenders, who for months have been eclipsed by the surging campaign of Howard Dean, have been fairly chummy of late — at Dr. Dean’s expense.

At a debate two weeks ago in New York, for example, when Mr. Gephardt questioned Dr. Dean’s support for Medicare, it was Mr. Kerry who came to Mr. Gephardt’s side, saying his tactic was fair.

Aides to both men say there is no overt conspiracy, but they acknowledge that at least at a staff level, the Gephardt and Kerry campaigns are more than friendly: they are sharing information about Dr. Dean that helps fuel each another’s attacks.

Campaign aides say their back-channel communications do not exactly constitute an unholy alliance. Such contacts are to be expected, after all, in an insular political world where nearly everyone has worked with everyone else at one time or another.

The underlined sentence is some strong reporting by David Halbfinger. Here’s the exchange that must have lead to this sentence:

HALBFINGER: Would you say that your back-channel communications with the Kerry (or Gephardt) camp represent an unholy alliance?



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What’s with Kinsley?

I vaguely recall reading something in the last week or two about an op-ed by Michael Kinsley that many thought was excessively anti-Clark, or anti-Clark and unfair. Who knows? I like generally like Kinsley’s work, but I didn’t read that one. But in today’s Washington Post, Kinsley uses the following argument to tee-off on Clark [emphasis mine]:

A widespread fantasy among liberals who loathe the Bush administration, for example, is that Colin Powell will resign as secretary of state and “say what he really thinks.” This will bring down the whole house of cards, these liberals believe. What he really thinks, they think, is more or less what they really think.

“Widespread”? If so, then I should know at least one person who expects that to happen. Seriously, a few hundred “liberals who loath the Bush administration” are likely to read this post in the next 24 hours. If you expect Powell to do this, please explain! Note that expecting him to resign in January of 2005 is not the same thing as expecting him to turn on the administration.

The rest of the op-ed makes about as much sense as the Powell part–maybe less.


UPDATE: Behold the exquisite elegance of Kinsley’s syllogism: if liberals’ positive views about one General (Powell) are a “fantasy,” then all positive views held by liberals about any General (Clark) must be fantasies. Of course, Kinsley’s own logic hoists him on his own petard: if one thing Kinsley says about Liberals and Generals is nonsensical, then all things Kinsley says about Liberals and Generals are nonsensical.

UPDATE: I found the earlier post about a previous Kinsley piece; it’s from Matt Yglesias at Tapped.

UPDATE 2: 300 or so visitors in the 12 hours since this post went up, many presumably liberal, but not one yet willing to fess up to this “widespread fantasy.”

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Low, Even for Astroturf

The Iraqi soldier astroturf is old news, but now it’s mainstream news. Here’s an exchange that would be amusing if it were not so depressingly revealing of the length GOP supporters will go to–in this case, as soldier’s grenade wound is not bad news, but instead a great opportunity for some good PR:

But another letter, purportedly written by a GI hospitalized for wounds suffered in a grenade attack, came as a surprise to Pfc. Nick Deaconson of Beckley, W.Va., according to his dad.

The soldier received a congratulatory phone call from his father, Timothy, for getting the letter published in the local newspaper.

“When I told him he wrote such a good letter, he said: ‘What letter?'” Timothy Deaconson told Gannett. “This is just not his (writing) style.”



UPDATE: Josh Marshall will be discussing this tonight on Aaron Brown’s show (10:00 Eastern).

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Remember Back When a Democrat Was in The White House?

Clinton, in his Jan. 19, 1999 State of the Union Speech:

For the first time in three decades, the budget is balanced. From a deficit of $290 billion in 1992, we had a surplus of $70 billion last year. And now we are on course for budget surpluses for the next 25 years.

Thanks to the pioneering leadership of all of you, we have the lowest violent crime rate in a quarter century and the cleanest environment in a quarter century.

America is a strong force for peace from Northern Ireland, to Bosnia, to the Middle East.


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Four More Days to Secure Iraq

Today there was another major car bombing in Baghdad. That reminded me of the report issued this summer by a team of experts hand-picked by the Pentagon to assess the situation in Iraq. The group, led by former Assistant Defense Secretary John Hamre, concluded that the U.S. administration in Iraq had three months to get their act together. Specifically, the July 17 report said:

The next 12 months will be decisive; the next three months are crucial to turning around the security situation, which is volatile in key parts of the country. All players are watching closely to see how resolutely the coalition will handle this challenge. The Iraqi population has exceedingly high expectations, and the window for cooperation may close rapidly if they do not see progress on delivering security, basic services, opportunities for broad political involvement, and economic opportunity.

Let’s see… three months from July 17 is… hmm… October 17? Can that be right? I must have done my math wrong, because that’s just 4 days from today. But with today’s car bombing, it seems like we still have some work to do in making Iraq secure. Adding it up, we’ve seen:

Two major car bomb attacks, killing at least 15 to 20 people…

One assassination of a Spanish intelligence official…

Numerous attacks on Iraqi oil assets, starting at least two pipeline fires and killing two oil company employees…

Seven US soldiers killed in guerrilla attacks…

And over 100 other attacks on US forces…

…All in just the PAST 8 DAYS.

Good thing we have 4 more days until the October 17 deadline for “turning around the security situation.”


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