2004 September 05 Sunday
Are The Economic Girlie Men Excessively Pessimistic?

In a funny line uttered at the Republican National Convention California Governor Arnold Schwarzenegger accused pessimists of being economic girlie men.

To those critics who are so pessimistic about our economy, I say: Don’t be economic girlie men! The U.S. economy remains the envy of the world. We have the highest economic growth of any of the world’s major industrialized nations.

Of course we have a much lower economic growth rate than China. But the Chinese are playing catch-up and that is easier to do than it is to develop new technology that raises maximum possible productivity even higher.

Morgan Stanley chief economist Stephen Roach defends the pessimistic views of the "economic girlie men".

By depicting those of us who worry about the state of the US economy as “economic girlie-men,” the Governor offered new meaning to the debate that is currently raging in financial markets. Far be it for me to take this characterization personally. But in the interest of fair play, it deserves a response.

Forget about politics -- at least for the moment -- and consider the facts: This economic recovery, by most conventional measures, has been amazingly lousy. Annualized growth in real GDP has averaged 3.4% over the first ten quarters of this upturn, far below the 5% norm of the previous six business cycles. Nonfarm payroll employment is up only 0.1%, on average, over the past ten quarters -- hugely deficient when compared with the 2.7% record of the past six recoveries. Real wage and salary disbursements -- the essence of the economy’s organic, or internal, income-generating capacity -- is up at only a 0.8% average annual rate over the past ten quarters versus the 3.9% norm of the previous six upturns. The federal government budget is out of control, having swung from surplus to deficit by six percentage points of GDP from 2000 to 2003. This was key in pushing the net national saving rate down to its all time low of 0.4% of GNP in early 2003. Lacking in domestic saving, the US has had to import foreign saving in order to keep the economy growing; that has given rise to a record current account deficit of 5.1% of GDP. All this speaks of a vulnerable and exceedingly low-quality recovery in the US. If that makes me an economic girlie boy, so be it.

Roach makes a convincing argument that the US economy has structural problems (e.g. a large trade deficit, a low domestic savings rate, and unfunded retirement liabilities) of long standing that are not the cause of any one politician's or party's policies. He thinks the blame game in Washington DC prevents the underlying problems from being rationally discussed and addressed.

Motley Fool editor Bill Mann bravely claims that he too is an economic girlie man.

I am concerned that low interest rates have been used to entice the American consumer to clean up a recession borne by an irresponsible corporate spending binge by going on one of his own. I'm afraid that the $200 billion-plus that Americans have cashed out of their houses has been spent, and the next drop in interest rates won't be concomitant with a rise in prices; rather, it will be because of a full-fledged financial emergency

Washington Post columnist Robert Samuelson cites Brookings Institution economist Charles Schultze to argue that the biggest reason for slow jobs growth during the economic recovery is higher than typical productivity growth.

From late 1995 to late 2000, productivity (output per hour worked) grew 2.6 percent annually. During the next three years, annual growth averaged 4.1 percent. If it had stayed at the lower level, there'd be 2 million more jobs, Schultze estimates. Unemployment would be about 5 percent.

Rapid productivity growth would be a better cause of high unemployment than other possible causes. Though if that is a major cause it brings with it the possibility that the economy is going to become so productive that an growing fraction of the population will beome permanently unemployed.

Another less frequently mentioned cause of the current unemployment rate is immigration. Count on leading figures in both political parties to avoid mentioning that in the election debates.

The economy is not in George W. Bush's favor for reelection. But he's not running on its economic record. He is running on attacks on Kerry's character and ability. Plus, he's wrapping the war in Iraq together with the war against terrorists to argue that the Iraq war was necessary in spite of the aftermath. His argument doesn't sound reasonable to me.

But I'm guessing at this point that Bush's argument is going to convince a majority of voters. One reason for this is that John Kerry is a weak candidate. Bush only has to seem better than Kerry to a lot of voters who do not understand the fallacies at the base of in Bush's foreign policy. Kerry is not going to try to argue against those fallacies (e.g. the supposedly universal desire for liberal democracy) because some of those fallacies are part of liberal mythology as well.

Share |      By Randall Parker at 2004 September 05 04:13 PM  Economics Political

John S Bolton said at September 5, 2004 9:20 PM:

The rise in oil prices and the $500+ billion current account deficit are predictors of recession coming soon. Kerry foolishly says that the economy is in a downturn persisting from four years ago, or implies such a view. Cheap oil works to the advantages of the American economy, expensive energy plays to the strengths of Europe and Asia.

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