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

60 Minutes Sunday

Should definitely be worth watching; Leslie Stahl will be interviewing former Treasury Secretary Paul O’Neill (who was basically fired) about his time in the White House. Here’s the lead from CBS’s teaser:

President Bush was so disengaged in cabinet meetings that he “was like a blind man in a roomful of deaf people,” says former Treasury Secretary Paul O’Neill in his first interview about his time as a White House insider.

It looks like O’Neill’s tale will comport with John DiLulio’s recounting of the Mayberry Machiavellis. Via Brad DeLong


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Conservatives Against Republicans

The American Conservative Union is launching a campaign against Republican fiscal policy. I never thought I would see such a thing.

Republican Congress on a Wild Spending Spree

Federal government spending is out of control. Despite the Republican Party hegemony – control of the White House and both houses of Congress – federal spending is increasing at a rate that is unacceptable.

The American Conservative Union has launched a special project: Stop the Spending! The project’s objective is to reverse the Washington spending spree, return fiscal discipline to Congress, and lay the groundwork to shrink government and its increasingly intrusive role in the private lives of average Americans.

Of course, this doesn’t mean that they’ll be supporting fiscally responsible Democrats to replace irresponsible Republicans, but it’s still fun to see.

By the way, if you want to see what a non-partisan, thoughtful, and well-respected organization fighting for fiscal responsibility looks like, check out The Concord Coalition.


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Kash’s Call #2: The Economic Recovery

My second prediction: the recovery will continue apace for another few months… but will start to die out by summer 2004.

Why? Put simply, I think that the bulk of the economic growth that we’re experiencing right now is due to the credit card binge that AB so aptly described yesterday. And that credit card binge will be coming to an end soon, without any source of economic growth to replace it.

We can divide the economy into four pieces, and consider each in turn.

1. Government taxing and spending (G and T, for those of you who’ve taken a course in macroeconomics): We haven’t quite maxed out on our national credit cards yet, but we’ve probably reached the peak of the current round of expansionary fiscal policy. Bush says he now wants to seriously rein in spending (though we’ll see about that). For sure, the tax cuts have largely come and gone by now. If the budget deficit starts to shrink mid-way through 2004 as it’s projected to, that implies a fiscal drag on the US economy. So G and T will start slowing the economy after the summer of 2004.

2. Consumer spending (C): Consumer spending has been rising like gangbusters (relative to everything else) over the past couple of years. But consumer debt is now at record levels (even if you look at payments/income instead of the gross level of debt), credit card defaults are at record levels, people have mortgaged their houses up to the hilt and already spent the proceeds, and the tax rebates and cuts will have been largely spent by May. That leaves one source for possible increased consumer spending: current income. But since my prediction is for a slowdown in the economy this summer, that implies a slowdown in consumer spending, too. So C doesn’t help the economy, and probably starts hurting it later this year.

3. Business spending (I): Yes, there’s a bit of pent-up demand for business spending to replace old equipment, but not much. The things that worry me hear are 1) corporate debt, which is still historically very high (though not quite as high as in 2001); and 2) excess capacity. Firms are wallowing in tons of excess capacity. Until that starts to get used up, businesses will not undertake further major expansions. So I will not provide a sustainable source of economic growth in the next year.

4. Foreign trade (X and M): Here we have the one real possibility for help. Thanks to the falling dollar, we may see some pick-up in exports. However, I don’t expect it to be a big one, for a couple of reasons. 1) It takes a long time for a fall in the dollar to translate into a major change in trade – like 2 or 3 years; 2) US exports depend not only on prices, but also on how much income the rest of the world has. With pretty sluggish economic growth around the world, there’s a big question mark about that; 3) Fundamentally, the US is not going to have an improving trade balance until it starts saving more and spending less as a country. In the absence of the latter, the fall in the dollar will just be offset by an increase in export prices and a fall in import prices, keeping US trade about where it is now. So X and M will not provide a big stimulus to the US economy this year.

Add it all together, and what do you get? Continued growth for a few more months, perhaps, but tapering off in the second half of the year.


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The Unemployment Rate Puzzle

This morning’s release of December’s unemployment data by the BLS contains the same puzzle that’s been dogging this economy for months. Why has the unemployment rate continued to fall over the past 6 months, even though jobs have not been created?

The answer is that people are dropping out of the labor force. The BLS conducts a survey every month and asks about 60,000 households whether they are working, and if not, whether they are actively looking for work. The number of people who have responded that they are not working but are actually looking for work (and thus are technically unemployed) has fallen from about 9.2 million in June to 8.4 million in December. That’s good. Unfortunately, they apparently haven’t stopped working because they’ve found jobs, since the number of jobs in the US economy is still below where it was a year ago. (See the graph in this post to see what I’m talking about.) They’ve stopped working for some other reason.

This makes me curious. Who is it that’s dropping out of the labor force and giving up on the search for work? And why are they no longer looking for work? The following graphs give some interesting information about this, though they don’t provide the answer.

The first one shows the “labor force participation rate” (LFPR), which counts the percentage of the total population that is either employed or actively looking for work. As you can see from the brown line, it has fallen quite a bit over the past couple of years, and shows no sign of picking up yet. The blue line shows the LFPR for women only. It rose a lot during the 1990s, and interestingly, hasn’t fallen. That gives us one piece of information about who’s leaving the labor force: they’re men, not women.

The second graph breaks the labor force into education categories. The brown line shows the LFPR for all people who are over 25 years old but never completed high school. The blue line shows people over 25 who have a college degree. The results really surprise me, but there they are: more poorly educated people are working, while more college educated people are dropping out of the labor force.

What’s the explanation? I honestly don’t know. Maybe this reflects a boom in low-skill jobs and a dearth of high-skill jobs in the US economy? Or maybe it’s a reflection of the growing income inequality in the US — well-educated (and thus wealthier) families have gotten so rich that can afford to have one member of the family stay home, while families who earn relatively little are being forced to work more to maintain their income. Or maybe it reflects a shift in preferences — perhaps some well-educated people are deciding that their families are more important than finding a new job?

If anyone has another good theory to explain these facts, I’d love to hear it.


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A Surprising Unemployment Report

The BLS reported this morning that the US economy created a net grand total of 1,000 jobs in December, according to the Department of Labor’s survey of businesses. That’s pretty bad. Surprisingly bad, in fact. According to the less reliable household survey, the US economy lost 54,000 jobs in December.

The good news is that the unemployment rate went down to 5.7%. That’s less bad. But since jobs aren’t being created, the only reason the unemployment rate is falling must be people dropping out of the labor force. Which is probably also bad.


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Giant, Happy-Fun, Credit Card Party

Mark Kleiman points to and excerpts a piece, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Peter Orzag (Brookings), Robert Rubin (Citigroup), and Allen Sinai (Decision Economics). (Synopsis here; full paper here.) I could blather on about the importance of inflation expectations, as well as consumer and investor confidence, to the smooth functioning of financial markets and the economy in general. But instead I’ll try an analogy.

If I were willing to max out my credit cards, I could have a really wild two or three week bender in Las Vegas. Not Dollar Bill Bennett style by any stretch, but a great time nonetheless. Until the supply of credit dwindles and the bills come due, at which point the good times cease.

If only there was some way I could pass the bills off to someone else, say my children and yours, and I didn’t particularly care about the well-being of those children, then everything would be fine and I could have my Las Vegas bender. This plan, in a nutshell, is precisely the economic policy of Bush and the Congressional Republicans.


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Compassionate Conservatism?

What Army bureaucrat thinks that this is reasonable behavior for a civilized society?

Amanda Bolduc on Wednesday was holding on tightly to her 3-month-old son, taking advantage of every last minute, memorizing his every feature — she won’t see him again for a very long time.

The young mother, a 2nd Lieutenant in the Army National Guard, has been deployed to Iraq. She will have to leave Brayden behind for the next 18 months while she serves with the 133rd Engineering Battalion.

Chalk it up as another cost of this war.


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Kash’s Call #1: China and the Yuan

I’ve gone back and forth on this one a bit, but this is my first prediction: China will maintain the yuan’s peg to the dollar throughout 2004.

Why? The key is China’s banking sector. I know, “the banking sector” sounds like an incredibly boring answer, but for better or worse it’s often the lynchpin of the whole economy. So let me explain. No, there is too much. Let me sum up.

Think of it this way. If China revalues (changes the exchange rate so the yuan is stronger), that will depress exports, reduce inflation, and cause holders of dollar assets in China to take a significant capital loss. On the other hand, if China holds the exchange rate constant, exports continue to boom and inflation rises.

But a bit of inflation is exactly what China wants right now. China has been flirting with deflation for a couple of years, and as fester reminded us yesterday, China now has a potential banking crisis to contend with. China’s banks are groaning under the weight of loans that borrowers can’t repay.

This sounds eerily like the situation in Japan in about 1990 or 1991. To cap off the analogy, note that China is also experiencing a housing market bubble, just like Japan at that time. Japan’s nemesis throughout the 1990s became deflation, which makes banking problems much worse. (It’s easier for borrowers to repay fixed loan amounts when prices – and hence their revenues – are rising rather than falling.)

China’s policymakers are aware of this. That’s why they will welcome some inflation – both to keep out of the deflationary spiral that ensnared Japan, and also to help improve the solvency of their banks. China is under significant pressure to turn its banks around fast, by the way, because according to WTO rules China must open its banking sector up to foreign competition by 2006. A bit of inflation would make the job that much easier. By contrast, a revaluation that causes banks to lose money on their dollar assets would make it that much harder.

One last note: As I already predicted back in August (remember, I get to remind you of those predictions I’ve made that were right), what China does with the yuan has become increasingly important, both politically and economically. That’s why my first 2004 prediction has to do with the value of the yuan. Economic events in China will have a bigger impact on the US than events in any other country. As a result, almost all of my other predictions depend on this one. So I’m going to start off the year guessing that China will hold the yuan where it is.


p.s.: I’m sure lots of you will disagree with me on this one, as well as my other calls; I’m looking forward to finding out why!

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