Tuesday, January 06, 2004

Economic decline of America,

This Associated Press article discusses the increase of consumer debt, doubling over the last dozen years. This trend has continued despite the cash infusion from mortgage refinancing. The conclusion has to be that people are stripping their own housing assets for ready cash. This combined with a historically low savings rate doesn't bode well for the solvency of the American household.

The cause why? Lou Dobbs Tonight has a special called Exporting America. While some commentators have noted that it's not a single one for one transfer of jobs overseas, it is true that the American manufacturing base has contracted 16% in the last three or so years. That's approximately one in every six manufacturing jobs. In addition, while there may be only about 20% overall job-loss contraction due to overseas job transfers from job losses the replacement 80% of jobs are not necessarily the same quality as the previous ones. This is the problem of the so-called underemployed, a variation on the old problem of being over-qualified for a position. Nowadays people are widely taking low paying and low benefit service jobs that are far less satisfying than their previous careers. The jobs re-training programs are openly redirecting people toward such occupations, in the anticipation that this is where they will be able to find employment. So a former manufacturing worker in Iowa would be retrained for a job as a respiratory therapist, making about half of what they made before.

This problem is not only with manufacturing jobs, but as Lou Dobbs Tonight points out, it is a widespread phenomena applying to accountants, computer programmers, telecommunication workers, etc. IBM recently announced that they too will join the trend by outsourcing more work overseas in order to remain competitive. Daniel Drezner on his blog has cited Catherine Mann's economic article describing anticipated productivity gains to come from an IT globalization outsourcing movement. The problem is that GDP has been as widely touted by the GWB Admin as as smoking 8%+ for several quarters. The figures cited for the growth of IT jobs for computer programmers are a few paltry percentage points, maybe not even matching the still low inflation figures that justifying the Fed currently holding interest rates at the historically low 4%. This is a field that used to lead the American economy, and now it's in a growth contraction. Clearly the job growth in America is not going to be led by the IT field. With all due respect to Catherine Mann, rationalizations like this to my mind just add up to apologism for Market Liberalism, corporate slanted globalization, and Supply Side economics run amok.

Well the plight of American labor may or may not move people, but the truth is that it's not just the little guy that is getting quashed here. There is danger of systematic failure, which is another way of saying that the whole economy might tank. How? Previously I've criticized Paul Krugman for allowing himself to be seduced into quick and dirty arguments that burned him as the economy has shown signs of turning around. Here he redeems himself by writing an excellent article discussing the true dangers of GWB Administration fiscal and trade policy.

Well is there any sign of this collapse of market confidence or is this just chicken little crying about the sky falling? Well as it turns out the dollar is tumbling compared to the euro, which is a direct proxy for relative confidence in economic performance. Consider that Europe has been widely acknowledged to be stuck in bad labor agreements in France, Germany, etc. and a basket case with companies not just like ELF turning belly-up but the dairy product giant Paramalat in Italy suddenly imploding. If despite this the markets have less confidence in American economic performance even before the true effects of large deficits haved kicked in then the falling dollar is no less than a blinking red danger sign.

As for the rising tide lifting all boats counter-argument, I guess somebody forgot to tell the manufactoring sector and for that matter the service sector as well. This is still a fragile economy, pumped up more by Central Bank, Treasury, and Federal stimulus than it is a truly recovered stage of the business cycle. While Krugman's arguments against the recovery of the economy being genuine are kind of iffy, his heart is in the right place and while the economic surge is real it's still wobbly. Everything could still go to hell pretty quickly if no one is minding the store. The continued deflation of confidence in financial markets due to the continuing unpunished scandals on Wall Street can't be exactly greasing the wheels of commerce either whatever the current hyperbolic heights of the DJIA.

As for any rebuttals based on criticizing Clinton, please remember that George Will has in the WaPo op-ed pages noted that Rubinomics, or the economics of Rubin the Treasury secretary under Clinton are actually more conservative than the present illiberal budgetary tragedy of the Republicans today despite the fact that they control Congress and Pennsylvania Avenue. I have yet to hear anyone accusing George Will of being a liberal commentator, and indeed his position is well established as a conservative economic pundit. The idea that Rubin, who as Will notes focused so long on establishing confidence, is forecasting a precipitious and future failure of market confidence in American economic prospects is rather quite alarming to any sensible person.

Some surely however will object that no reasonable person would take a course that utterly irresponsible, and that surely the GWB Administration would never do anything that completely disasterous to America. Well there's a problem with that interpretation of events. Jackson Diehl in this interesting piece in the WaPo illustrates how perfectly foreseeable many of the current factors in the Iraqi reconstruction struggle were. Jackson Diehl also to the extent of my knowledge hasn't been accused of being a liberal apologist or advocate. As this is the case then, the Bush II Admin is on record as taking on a huge task but completely ignoring any salient and proven facts on how they should proceed and because of that running into huge and entirely anticipatable problems later on. As Rummy might say, it is known that the facts are not "unknowable", and so we can know them and so act on them. So the fact of the situation is that the GWB Administration has a demonstrable track record of being able to drive a hugely important situation directly into a brick wall despite abundant and perfectly accurate information warning them to do otherwise.

This of course does not bode well for the prospects of the Bush II Administration being able to manage or finesse this little problem of a systematic market failure of confidence that may strike America because of fiscal mismanagement. Indeed, the Bush II Administration seems to be perfectly determined to go forward full steam ahead on the basis focusing on ultimately misleading attention on indicators like short term GDP growth, stabilization in the rate of unemployment claims, and a not quite as big as expected budget shortfall. Yes, it's true the Bush II Administration is taking it as a good sign that we're not quite as deep into the hole as the worst case scenarios might have suggested, but instead we're just short of them. While I'm not advocating that the worst should happen, it seems doubtful to me that merely falling short of the worst should be a grand occasion for celebrating success as much as a grateful reprieve to be quickly followed by a scramble to get out the pit as swiftly as possible. This is the nature of hubris however, even when a way out offers itself the prideful and arrogant take it as a sign that one should press on and damn the consequences. This is of course a great way to get a situation to blow up in one's face by going too far and rushing in where angels fear to tread.

As such the final conclusion is that unless there's a serious change of heart in Pennsylvania Avenue on the scale of the Grinch's conversion or that there's a change in office holders come November then we are all well and truly fucked.


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