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Might Be Bad...

I knew the economic news was bad, but I did not know how bad, until I
saw href="http://www.economist.com/business/displaystory.cfm?story_id=8079134">this
article in The Economist, thanks to a href="http://delong.typepad.com/sdj/2006/10/the_economist_g.html">link
from Brad DeLong.


i-a9448b445550c08e1fea4898c10f5e0f-D4306SB1.jpg


EVERYONE knows that America's economy is slowing.
Thanks to
the bursting of the housing bubble, overall GDP growth has fallen back
sharply. The biggest short-term uncertainty for the world economy is
whether American consumers stop spending and drag the country into
recession. But beyond the business cycle, another slowdown has received
scant attention. America's potential rate of growth—that is,
the
pace at which annual output can expand without pushing up
inflation—is also falling. By some estimates, it could drop
to
2.5% over the next few years, which would be the slowest pace in over a
century...


"The slowest pace in a century" would include the Great Depression.



Of course nobody really knows what will happen in the next six months.
 The rest of the article is full of caveats regarding the
difficulties of economic forecasting.  But what strikes me
about
this article is how pointedly the authors emphasize the decline in the
labor force participation rate.  Although the (largely
artificial)
unemployment rate is down, workforce participation is falling.
 Also, the rate of investment in IT is declining.  



Interestingly, the Economist has a blog that accompanies its online
content.  They point out the discrepancy between the glowing
economic statistics hyped by the Administration, and the true picture.
 They href="http://www.economist.com/debate/freeexchange/2006/10/big_bad_news_for_mr_bush.cfm">point
out that the glowing numbers do not seem to be resulting in
political gains for the Party in power, and explain why:


We'd suggest that this is because the statistics,
like GDP,
are not actually glowing; in fact, they're barely emitting enough light
to check your watch by. Even fantastic headline numbers, like 4.6%
unemployment, disguise weak wage growth and sagging labour force
participation. Perhaps even more problematically for the Republicans,
what growth there is isn't being felt by the average voter. Companies
are increasing compensation--but they're spending it on benefits like
health insurance, which doesn't feel the same as a wage increase even
if you're one of the unlucky few who gets a $100,000 cancer treatment
out of it. And income growth is concentrated among the wealthy, who are
too few to swing an election.



The objection I have to that, is that the very wealthy can
swing an election -- buy funding massive advertising campaigns,
essentially href="http://jackshow.blogs.com/jack/2006/10/essay_the_best_.html">buying
votes.  


Statewide, whether you like it or not, Dick DeVos is,
in a sense,
attempting to buy the governorship. He’s using his own
personal fortune
to buy TV advertising on a scale never seen before. The Democrats
can’t
match that, but are doing the best they can to raise enough to buy the
governorship right back. Neither candidate would like my words. They
don’t want to talk about “buying” an
election...



I'm tempted to go off on a tangent, but I will settle for merely
providing this link about href="http://www.metrotimes.com/editorial/story.asp?id=9712"
rel="tag">Dick DeVos.



The economic news is a matter of great concern for us all.
 Partly, it is because it could lead to a slowdown in funding
for
scientific research, education, and the like...all things that are
needed to give the economy a boost.  



The other thing, which is something I have not seen in other writings
about the downturn in the economy, is the anticipated effect of the end
of the war in Iraq.  Probably no one is writing about it
because
it is impossible to know when it will end.  But it has to end
sometime, probably fairly soon.  Although that will tend to
reduce
deficit spending and ease inflationary pressures, it also will mean a
drop in the industrial output needed to sustain the war effort.



I suppose we could try to make up for it by increasing arms sales to
other countries, but those other countries href="http://www.irishexaminer.com/irishexaminer/pages/story.aspx-qqqg=world-qqqm=world-qqqa=world-qqqid=16919-qqqx=1.asp">might
not cooperate.
 The UN is drafting a new resolution for control of
international
arms dealing.  (The USA is the only country that voted against
it.)  


The George W.
Bush administration, a close
ally of the US gun lobby, has said it was willing to endorse a set of
voluntary principles aimed at guiding arms deals but would not back
binding controls on transfers across national boundaries.



But even if we do not sign whatever treaty comes of this, if other
countries abide by it, they won't buy the arms, even if we want to sell
them.



The problem here, as I see it, is that the USA is acting like a bully,
not a good global citizen.  And if times do get tough, it
would be better if we were on good terms with other countries.
 If our economy does start to fall apart, it would be nice if
others would cooperate with us.  But with the kind of global
citizenship we've shown lately, it would be understandable if others
are not particularly disposed to help.


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The other thing, which is something I have not seen in other writings about the downturn in the economy, is the anticipated effect of the end of the war in Iraq. Probably no one is writing about it because it is impossible to know when it will end. But it has to end sometime, probably fairly soon. Although that will tend to reduce deficit spending and ease inflationary pressures, it also will mean a drop in the industrial output needed to sustain the war effort.

I disagree, it will probably have little or no effect on the economy if we leave Iraq. The industrial output needed to maintain the war is less consequential to our economy than it was in WWII, primarily because the war effort during that era required full mobilization. Not only does the relatively small effort in Iraq not require full mobilization, a much larger portion of the industrial manufacturing base that supports is overseas (e.g., most of our steel is purchased from China).

If anything, our war in Iraq likely had a negative effect on the economy, since it created a large amount of instability in the mid-east which lead to an inevitable price spike in oil. But even if we leave, the instability is already there in the form of a civil war. Plus Iran is expanding it's hegemony throughout the region, which is not a good indication of the prospects for any kind of Western-style liberal democracy taking root in the region.

As for the world not cooperating in the event of an economic downturn, I hate to say it, but we've made our bed. If our Jacksonian disdain for the rest of the world comes back to bite us in the ass, we have ourselves to blame for trusting the current thugs in Washington and keeping them in power for so long.

By Tyler DiPietro (not verified) on 28 Oct 2006 #permalink