[OPE-L:7276] Re: NYTimes.com Article: Where's the Boom?

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Tue May 28 2002 - 15:28:55 EDT

Rakesh, I pretty much agree with Krugman here.  I especially agree that a
dangerous new factor for the US economy is its "fall from grace" in the
eyes of foreign investors, as we have discussed in recent posts.  If
foreign investors cease to provide the US with $1.2 billion every day, as
they seem to have in recent months, then the effect could be very nasty
for the US economy.  My comparison would not be with 1983, but with the
late 1990s, the heady years of record capital inflows.  

The main factor which Krugman leaves out, characteristically for
mainstream economists, is PROFIT.  As we have discussed, the share and the
rate of profit declined precipitously from 1997 to 2001.  Profit has now
stopped declining, and has even increased a little, but still has a long
way to go to recover the 1997 peak.  I think this is the main reason why
investment spending will remain weak in the months ahead.  

Furthermore, I think low profits will also have additional negative
effects on the economy.  In order to increase their profits, businesses
continue to try to cut costs aggressively, mainly by laying off workers or
reducing hours,.  Sooner or later (and I think pretty soon), these
reductions in workers' income will cause consumer spending to decline
(consumer spending cannot be propped up by debt forever).  And when that
happens, we will be back in a recession, which is likely to be worse this
time, because it will be compounded by more business bankruptcies, more
personal bankruptcies, and a reduction of capital inflows.  If the capital
inflows turn into outflows, then we will be in really serious trouble.


On Tue, 28 May 2002, Rakesh Bhandari wrote:

> Fred may want to comment!
> rb
> Where's the Boom?
> May 28, 2002
> Summertime, and the living is iffy. Double-dippers -
> economists who believe that the economy will turn down
> again - are still a small minority. But we're no longer
> hearing the triumphalist predictions of roaring recovery
> that were so prevalent back in March.
> The funny thing is that there hasn't been much negative
> economic news, just an absence of the good news that we
> were told to expect. Above all, business investment, whose
> plunge led us into this slump, has yet to show any serious
> signs of life.
> How did so many business economists convince themselves,
> and each other, that a great boom was imminent? No doubt it
> was the result of wishful thinking on several levels: the
> investment community wants to sell stocks, and it also
> wants to believe that Republican administrations are good
> for business. But I suspect that a big factor in the
> premature declarations of victory was a false analogy
> between George W. Bush and Ronald Reagan, which led people
> to expect that 2002 would play like 1983.
> At a superficial level, there are strong parallels between
> the second year of the first Reagan administration and the
> first year of the second Bush administration. Both men
> pushed through large tax cuts and big military buildups;
> both inveighed against evil (empire, axis, whatever). And
> in 1982, as in 2001, the Fed reversed a previous policy of
> raising interest rates to fight inflation, cutting rates
> dramatically to fight recession instead. So why shouldn't
> it be morning in America all over again?
> Because the recessions were very different. In 1982 the
> economy was held back by high interest rates; it was ready
> to surge forward as soon as the restraints were released.
> In 2001 the economy slowed because businesses had
> overreached themselves; there are no obvious sources of
> pent-up demand.
> Perhaps the most striking difference between the Reagan
> recession and the Bush recession involves housing. In 1982,
> thanks to several years of very high interest rates, home
> building was moribund: real residential investment was at a
> 13-year low, more than 40 percent below its previous peak.
> So there was a lot of demand ready to roll as soon as
> interest rates fell. In fact, during the first year of the
> Reagan recovery residential investment rose 46 percent.
> Basically, it was a housing-led boom.
> This time, residential investment kept rising through the
> recession, thanks to the Fed's interest rate cuts. It's
> hard to see a dramatic further increase; if anything,
> housing may be in a mild bubble.
> So what will lead us into a full-fledged recovery? Beats
> me.
> The truth is that instead of the vigorous recovery we were
> supposed to have by now, our economy seems to be in a state
> of suspense, waiting for something to happen. Optimists
> think that business investment will, finally, turn up; but
> businesses still have lots of excess capacity, and show
> little inclination to go on another investment spree.
> Pessimists think that consumers, faced with a
> still-worsening job picture, will finally stop spending.
> But consumers have stayed doggedly optimistic, as if they
> really believe in the T-shirt slogan: When the going gets
> tough, the tough go shopping.
> There is, however, one more wild card, which is also a key
> contrast with the Reagan years: the attitude of foreign
> investors. During the Reagan recovery overseas investors,
> who had previously been down on America, flocked in. This
> time we start from a very different position. Foreigners
> have been wildly enthusiastic about America for years - an
> attitude we have come to count on, because we need $1.2
> billion in capital inflows every day to cover our
> foreign-trade deficit. What happens as they lose their
> enthusiasm?
> One of the largely unreported stories of the last few
> months - in the U.S. media, anyway - is the precipitous
> decline of foreign confidence in American leadership and
> institutions. Enron, aggressive accounting, budget
> deficits, steel tariffs, the farm bill, F.B.I. bungling -
> all of it adds up, in European minds in particular, to what
> Barton Biggs of Morgan Stanley calls a "fall from grace."
> Foreign purchases of U.S. stocks, foreign acquisitions of
> U.S. companies, are way off.
> I don't want to sound like a doomsayer here. But one thing
> is clear: Those confident declarations, several months ago,
> that our troubles were over look pretty foolish now.
> http://www.nytimes.com/2002/05/28/opinion/28KRUG.html?ex=1023575324&ei=1&en=1cfabe876856887b

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