The beginning of the end?: Economic growth slowed significantly in the fourth quarter. So, what's the consensus view? Is this a momentary speed bump, owing to Hurricane Katrina?
Or is it something else: namely, the end of the housing-inspired boom and all else that came with our easy credit policies. Our economy has essentially been fueled by people selling each other their houses at higher and higher prices, financed by ridiculous individual debt burdens.
I have to say I don't see how we're going to get out of this one easily. With inflation on the horizon in the form of energy and transportation costs - that have a rippling effect, I should note - we can't exactly prime the pump with lower interest rates. Even if we could, who exactly is equipped to borrow more money right now?
I'm not predicting total chaos or doom and gloom, but it seems some sort of sustained contraction is in order as the economy works these kinks out.
The problem with this latest expansion (and why it had no solid base) was that to participate in it the middle and lower economic classes had to borrow. There was nothing in the way of real wage growth for the majority of Americans, but they were told prosperity was chugging right along.
Now let's bring it back. Let's say I'm a Democrat (I know, I know, let's just pretend). How can I make a reasonable critique of the Administration's economic policies without sounding, well, like a Democrat? I think we all know Bush's answer to any slow down will be tax cuts on top of tax cuts. But this is precisely the problem, isn't it? There's too much money out there right now!
Let's go back to 2001. We were entering a recession, which was very natural after the late 90s boom. The massive tax cuts - enhanced after 9-11 with deficit spending - cut short the recession and put us on our current wobbly course. Should we have just let the recession run its course? The problems of the late 90s - easy credit, speculation - weren't economically resolved by the perversely short recession. They've been hanging around, growing worse all the while.
So I put it to the group: make the economic case for the Democratic Party.
Or is it something else: namely, the end of the housing-inspired boom and all else that came with our easy credit policies. Our economy has essentially been fueled by people selling each other their houses at higher and higher prices, financed by ridiculous individual debt burdens.
I have to say I don't see how we're going to get out of this one easily. With inflation on the horizon in the form of energy and transportation costs - that have a rippling effect, I should note - we can't exactly prime the pump with lower interest rates. Even if we could, who exactly is equipped to borrow more money right now?
I'm not predicting total chaos or doom and gloom, but it seems some sort of sustained contraction is in order as the economy works these kinks out.
The problem with this latest expansion (and why it had no solid base) was that to participate in it the middle and lower economic classes had to borrow. There was nothing in the way of real wage growth for the majority of Americans, but they were told prosperity was chugging right along.
Now let's bring it back. Let's say I'm a Democrat (I know, I know, let's just pretend). How can I make a reasonable critique of the Administration's economic policies without sounding, well, like a Democrat? I think we all know Bush's answer to any slow down will be tax cuts on top of tax cuts. But this is precisely the problem, isn't it? There's too much money out there right now!
Let's go back to 2001. We were entering a recession, which was very natural after the late 90s boom. The massive tax cuts - enhanced after 9-11 with deficit spending - cut short the recession and put us on our current wobbly course. Should we have just let the recession run its course? The problems of the late 90s - easy credit, speculation - weren't economically resolved by the perversely short recession. They've been hanging around, growing worse all the while.
So I put it to the group: make the economic case for the Democratic Party.
posted by Joshua @ 3:23 PM
14 Comments:
I'm sure I'll get ripped apart here, but it seems to me that any smart Democrat - in this situation - would raise taxes to a sensible level and spend the money on a low-income-housing initiative, thereby offsetting the damage the bubble-burst is going to level on the construction industry. Low-to-middle income prospective homeowners buy into the property rather than renting section-8-style, and the banking industry keeps from taking too much of a hit as well.
As for energy, we've GOT TO get into alternative sources RIGHT NOW. This can't wait another term, or another administration, and if the next guy in office doesn't turn the situation around it will be the death of their party. We've got to throw our money into innovation, and save our corporate tax-breaks for the New Economy companies that are playing ball with the new system. This isn't about environmentalism - hell I'd go for coal right now if it were economically feasible. Nineteenth century China saw the first time a war was faught between two parties over who would supply the thrid parties addiction - in this case Opium. In our case it's oil, and the war will be nuclear. This is our national security. This is the silver bullet. This is the way to win the "war" on terror. The Arab world wants to be rid of the west, then let the west be rid of them. But we can never be free of them while our entire economy is based on the one thing they've got.
A Democrat does the two things above, and I think we're back on track. The growth will take a while, but that's kind of the point.
I agree wholeheartedly with the second part.
Pascal -- I couldn't agree with you more.
Bush's entire economic policy has made little sense to me. I have never been able to figure out why we are a nation at "war" without having to make any stateside sacrifices. The result is a horrible disconnect between the troops overseas and the people at home.
Hold on there Cato.
First, you're using week-to-week data to determine the future of the economy. We might be pretty stabile, but that's not really what we're talking about in terms of administrative political policy.
Second, We still have one of the (if not the) lowest tax rates in the world, because of the uniquely American idea that taxes are unwarranted. We need them, not just in order to pay for a civilized society, but also in order to promote the economy. You talk about the benefits to homeowners, but I'm discussing a way to fed the economy and allow the lower middle-class to become homeowners as well, increasing capital.
Third, the biggest reason we can't move off of oil is that we think we can't move away from oil. If you grabbed a crack-head off of the street and made a project out of getting him a job and making him a productive member of society, what would your first priority be? Getting him a haircut? Brushing up his resume? No. The first priority would be GETTING HIM OFF OF THE CRACK! America is fatally addicted to oil. We are fighting WARS over it with our suppliers. One of them is building nuclear weapons now in order to scare us into submission. This is not a "ween ourselves off of it over a century or so" thing. This needs action now, and if this nation is going to survive without a nuclear attack in the next ten years, then it needs to not be fundamentally dependent on those who would kill us.
Obviously a worm hole has opened up and dragged me into an alternate reality, because I again find myself in (near) total agreement with Pascal's last statement.
Cato, I think your assumptions on the future of petroleum are a bit too rosy: "Encouraging further research in energy is a good idea, but we need lots of oil, and we're gonna need it for a good while yet...Such high revenues encourage innovation and exploration. The Middle East knows that they depends on foreign demand for the one thing they've got that's worth exporting. Saudi Arabia is perfectly happy to run the biggest oil company in the world and have a tax-free kingdom. They will make sure we get our oil, as will we."
Well, of course the Saudis are perfectly happy with the present situation, but that alone does guarantee it will exist in perpetuity!
Further, let me deconstruct your economic argument here, both stated and unstated premises:
1) We need oil, a lot
2) Higher demand will lead to greater exploration
3) More oil will therefore be discovered and exported to meet demand
(Conclusion) Happiness reigns
I agree with 1 and 2 on a simple economic basis, but you must admit we have NO control over #3. Increased demand for oil does not logically lead to there being more oil on the planet. Nor does it logically lead to the oil that's discovered being imported to us.
China and India (those guys again) have a rapidly increasing demand for oil. Do we really think that we're going to be able to find enough oil to match everyone's increasing demand without any price increases? I think the assumption that 'we are America, therefore we can get whichever resources we want,' is really going to hit a brick wall soon.
As for highly leveraged individuals net worth increasing, I assert a lot of that is on paper. What happens if the housing market deflates? Well, now they're a lot poorer on paper and they still have oodles of debt. This is simply NOT a good situation. I'm not saying the next figures will be awful, I'm just saying the economy is fragile and we could be looking a pretty blah economy until we work all of these problems out of the system.
One note: What tax bracket are you in that you're paying 40%?!?
Further note on oil: Kuwait has nowhere near as much as we thought.
Wow, Tac, this is sort of like Xavier and Magneto joining up in X2.
I dunno, Xavier and Magneto agreeing isn't THAT uncommon. Hell, Magneto was the leader of the X-Men for quite a few issues back in the 200's, when Xavier was off in La-La-Lilandra-Land.
Ahem... Right. Anyway. I suppose I see most of these issues as parts of the same big issue: Willful ignorance. I'm not sure we are in for "a nuclear attack in the next ten years", but that's not the point. The point is that we are working ourselves into a position that will be nigh unwinnable but in such a way that the severity of that situation isn't obvious until long after it is possible to do anything about it. Its hard to tell exactly where that point of no return is, but that is all the more reason to assume the worst and start trying to play catch-up.
Specifically,
Energy: This is not a US problem. This is a global problem. Thanks to that pesky first law of thermodynmaics, we cannot magically generate the massive amounts of energy required to keep our modern technology running. The industrialized world consumes a lot already to achieve the standards of living it has, but as Tacitean points out, China and India (just to name the biggest and most immediate) are on the rise and with populations several times the size of the US (or Europe), their eventual energy needs will be even greater. Securing a renewable (or much more plentiful) source of energy is an absolute prerequisite to the survival of this race. America getting there first is an issue of strategy and national security.
Debt: As Tacitean pointed out, American housholds are taking on insane amounts of debt. Our national household saving rate is actually negative! Let me say that again. On average, an American household, not only saves nothing, it actually spends more money than it makes. That is insane. Then there is the national debt with is chugging along nicely thanks to massive budget deficits as far as the eye can see even without the deep impact of the baby boomers crash landing into retirement just as social security and medicare start laying out more than they take in. Again, this situation is all the more dangerous because other nations will indulge our spending til the very last moment, meaning that we won't feel like we are in trouble until it all comes crashing down. Now, one can hope that those same nations will be canny enough to realize that in the globalized system we have, they will come tumbling down with America, but you can't be sure, and even if they realize, they too, may be powerless to do anything at a late hour.
Externailities: Specifically, global warming. Another issue where the arrival of the real cost lags dangerously behind the goodies we get incurring it. I think it is safe to say at this point that scientific evidence will only continue to solidify the case for global warming being imminent and a Very Bad Thing. I don't have links on me now, but Europe appears to be cooling due to disruptions in the gulf stream, 2005 was the warmest year on record, and some newer studies are starting to suggest that the effects of a few degrees rise in global temperatures are worse than previously assumed. Worst of all, environmental chaos like this will have a MUCH bigger impact on the world's poorer areas which by some whacky coincidence just happen to be the worlds most politically unstable regions.
I agree with the urgency of tacitean and bookie and especially with their call for leadership on these issues from ANYone. We really have our heads in the sand on a lot of issues and it SHOULD be the job of a leader to slap us into awareness however grumpy we might be about it.
So, having poured as much gloom as I can onto this thread, I would like to close with a question. What aspects of our current political system do we think are impediments to the sort of long term leadership we are calling for, and what changes could realistically be implemented to deal with them and get the ball rolling on the things that matter?
Well, you know me. Corruption inherent in the system is the biggest impediment I see. If you sell it well enough, you can get the people into aynthing and in pretty short time, so I don't see the shift away from oil as being as big an issue as some - and of course it would heartily revitalize the economy here if done correctly. My idea is simply for the Good and Effective Leader would use this inherent corruption to his advantage, helping his suppoters become the leaders in the New Regime of the affected fields.
I don't know how many times I can say it, but the question of our oil-based society isn't as immediately problematic in the environmental sphere (though that's certainly a problem less then a century in the future) that it is a geopolitical one. We need the middle east. Not for their culture or religious history or even their strategic defense. We need them for their oil, because they're the only ones who can prvide for our national addiction to it. We can't do it ourselves. If we took what we have nbow, we'd have roughly four years at current consumption before we gobbled it up. If we drilled in ANWAR, maybe four years and six months. Our dealers are rapidly developing nuclear arms for specific use against two states: Israel and the U.S. My guess is that Israel will be the testing ground to get the U.S. to mobilize, at which point all of the Arab world will be in play, and we won't have any allies there. Now I'm not one for pretending to have an answer for how Israel can survive on Islamic turf (particularly when said turf was taken from an existing state) but I know that we'll be in a much better negotiating position, and in much better position to defend Israel, if our entire national lifestyle isn't relying on governments who would just as soon see us all dead.
Finally, as I've told you in person Cato, if you're getting taxed at 40%, you're getting screwed (under our current system) and you need to find a competent accountant. My payroll is currently taxed at 6.125%, and that's coming from a paranoid accountant who won't even give my boss business expense breaks. Also, Sales tax was intended to be levied on the markets, not the buyers, so blame your local retailers if you hate the amount they add on to your bill. They just thought of the easiest way to alleviate themselves of it.
Oh, and I totally miscalculated in my head. My payroll is taxed at 12.5%. Sorry.
Bookie: Again, I want to stress that oil is not "our national" addiction. It is the human race's addiction. The world comprises those with the industry and standard of living to consume lots of oil, and those who are working to get there. That's it.
Cato: You are correct most likely correct that the actually amount of oil we can extract, as exploration in certain countries' territories (and waters) is liberalized and especially as new technologies increase our recovery rate (currently we get only about 35% out of a given field - up from 20% 30 years ago). Set that against reasonable consumption growth projections and it is probably enough to see us through the middle of the century. HOWEVER, how much oil we CAN get under ideal situations depends heavily on investment in capacity, which has been sorely lacking in the past decade or two (contributing heavily to current global prices). Global politics doesn't care how much oil CAN be extracted, it care how much oil IS available at a given time, at what price and from whom. That last bit is very important. As others have pointed out, a lot of oil is not in the nicest places, which means dealing with some nasty "governments".
The real problem however is that even if any sort of crisis is half a century off, we have zero margin for error with respect to having something else to take its place when it does become scarce. Furthermore, we cannot, with any reasonable certainty, predict how long it will take to develop and implement a radically different source of energy. We can predict that at some point in the next century, oil will become very, very, difficult (for economic and political reasons)to produce in sufficient quantities to sustain the standards of living to which many countries have become accustomed. Therefore, it follows that we should assume the absolute worst case estimate for oil shortage and prioritize preparation of an alternative. The result of such a prioritization would either be A)we save ourselves just in time and end up in a strong position relative to other nations or B)we gain a greater degree of energy independence well ahead of the big crunch and are therefore able to pursue our foreign interests with many fewer unwanted constraints (like pretending that the House of Saud aren't a bunch of corrupt crooks). Either way, we reap enormous benefits AND save ourselves from a VERY nasty standard of living adjustment (or global war). Again, to stress my central point, all these problems are of that dangerous species whose negatives only really manifest LONG after your chance at resolving them has passed you by. If we don't know when that point is, all the more reason to assume the worst and get prepared ahead of time.
Addendum: The same thing goes for our debt troubles. I am not arguing that any of the current figures point to an immediate economic collapse. The US economy will chug along quite well certainly for the next five years, probably for the next ten. But there will come a point, and almost certainly in less than 20 years, when the system will no longer be able to bear the imbalances in the world economy. And then things get interesting...
Where I got my info from: In my previous post, you might noticed that I have switched to supporting Cato's somewhat less negative assumptions about when we'll "run out" of oil (although my conclusions are still different than his). I did so after perusing a survey about oil published in April of last year by the Economist. None of us are petrogeologists, so the best we can do is weigh the balance of what various people and groups more informed than us have to say. In general, I trust the Economist to have a pretty good taste in which sources of info it trusts. I'm not sure hosting the article without permission is kosher, and you need an account to read it online, but I would be happy to make a pdf of it, or to give any specific person my account password if they want to check it out for themselves.
Right on, Socratic. Right on. Though oil is still more America's addiction than anyone else's, and I was addressing it as a National issue that really doesn't care what France and Brazil do for energy.
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