American Economy and American Election in 2004

August 10, 2003

R L Norman, Jr. Ph.D.

Email:

JMKeynes@SecularStagnation.Com

This gradual departure [from consumer spending from mortgage refinancing] passes the torch to business spending — to chief executives like Alexander Cutler at the Eaton Corporation... a giant manufacturer of truck transmissions, hydraulic equipment, circuit breakers, electrical control panels and the like.... These sales are higher for Eaton, Mr. Cutler says, but not because of an improving business climate. "We are taking customers away from competitors, not benefiting from an expanding market," he said.

Virtually all of the [business] spending, this year and last, went into product development, including machinery to make the new products, so that Eaton could take market share away from competitors. None was for expansion. Mr. Eaton underscores that point. [my emphasis]

'Business Spending Helps Offset Lag in Refinancing',

www.NYTimes.Com, August 9, 2003, Louis Uchitelle and Jennifer Bayot.

In Boulder, 20 percent of the apartments are now vacant at Villas at the Atrium, a retirement home that costs $2,400 a month for a one-bedroom apartment, meals, housekeeping and other services. .... Three years ago, Villas at the Atrium was full. ..."People are moving out of here because they can't afford it anymore," said Elizabeth Pahlke, who moved to the Atrium four years ago with her husband and has continued to live there since he died six months ago. "I'm having to dig into the principal of my investments," she added, "to pay for it."

[my emphasis]

To conserve principal, she has made small spending cuts. She no longer eats out, as she did with her husband, and avoids buying souvenirs on trips...

'What Investors Should Do Now', www.NYTimes.Com,

August 10, 2003, David Leonhardt and Alex Markels.

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Introduction: From 1929 to 2000

Almost 70 years ago, as the Crash of October 1929 began feeding into the coming Great Depression, the market fell dramatically. In a series of mistakes, the Federal Reserve did not lower the short-term interest rates far enough and nor seemingly long enough to break the deflationary trend. Milton Friedman seemingly has made a 60-year career of describing what the Fed should have done in the first quarters after the 1929 market collapse. Fortunately for us today, Alan Greenspan, chief of the American Federal Reserve, seems to have read some of Friedman and has remain sentient enough to apply Friedman's theories to the 2000 collapse. Yet having prevented a stock market collapse from trending immediately into a Depression has not been enough. The economy seems to be in a slow stall, with business spending only now beginning to return to something like normal levels in 2003, but with businesses spending for technology, which might allow them to lower their labor costs and to attempt to lower their prices as well. It is now a business climate of taking away market share from competitors in a flat economy, not of expanding total sales into a rising GDP.

Today almost three years after the collapse of NASDAQ, the high tech index, the economy is still barely hanging on, largely to the economic understanding of a single person Greenspan. Greenspan has almost single-handedly delayed an even further decline in the stock markets. In his efforts, he has received nothing positive from the president of the United States, George W. Bush. Bush has spent the last 18 months dragging an unwilling world into Iraq, where America's finest are being slowly cut to pieces, with almost no international support, either political or military. Bush has placed these people into harms way, but has not extended himself very much to try to get our military some desperately needed foreign support. Bush is too proud to ask for help, if we can believe Democratic presidential candidate John Kerry. Personally, I think that Kerry is being too charitable. I'm not sure that Bush has the capacity to understand what the role is of the commander in chief. Landing on aircraft carriers and getting a nice front-page picture seems to be the extent of Mr. Bush's understandings of military life.

War on Terror: The Iraqi Blunder

Our soldiers won the initial battle, but today are facing an increasingly skeptical Iraqi population and non-Iraqi terrorists are slowly infiltrating into the general population. Baghdad may soon resemble Beirut of the early 1980s, after an ill-fated Israeli invasion destroyed the weak political system of Lebanon. There Ariel Sharon led an unwilling Israeli population and army into the disaster of Beirut and soon thereafter, several hundred Palestinian civilians in the camps of Sabra and Shantilla were murdered by Lebanese militia; at a minimum under the umbrella of protection provided by the Israeli army. Sharon was so disgraced politically, that he spent most of the next 20 years out of major political office.

After the 911 attack upon the United States, hard-right wing American supporters of Israel's occupation of the West Bank, began pulling Bush into the utterly foolish idea that Saddam was a primary force behind 911. And as utterly foolish as this idea was, Bush slowly began moving into that direction. After the successes in Afghanistan, Bush began moving towards Iraq with once excuse after another, seeking to get the globe behind him for second crack at Iraq; with his own CIA and military advisors seemingly skeptical of Saddam's culpability in 911 and even more skeptical over war in Iraq even as Afghanistan needed more time and as North Korea began moving towards nuclear weaponry.

Now, after the supposed end of war, American soldiers are in a war of attrition, facing a faceless enemy working largely from his own turf and with increased tacit support of the Iraqi population. Thus with 911 and the last 18 months of uncertainty over the war with Iraq, business spending simply never recovered from the beginning of recession of 2000. As the above quote suggests, business spending is slowly recovering but is being directed towards a direction other than expansion of the economy. Businesses appear to be ordering either needed replacement items or items oriented towards taking business share away from competitors. This entails buying technology, which will allow one company to lower its labor costs and thus lower the price it will charge its customers.

From Hoover to Bush:

Will 3,000,000 Jobless and the Military Vote for Bush in 2004?

Politically at this time, absolutely nothing can be expected from the existing Republican Party. Bush has no clue of what is happening in America, much less in the global economy. And barring a very large increase in business spending starting almost immediately and a concurrent rise in hiring, Bush will run in 2004 as the first president since Herbert Hoover to lose jobs during four years in office. How many of the estimated 3 million made jobless since he assumed office, will vote remains to be seen. However, it is unlikely that a majority of such unemployed will vote Republican. Moreover, while the military brass has stifled for the moment public discontent in Iraq among American NCOs, if the present rate of attrition continues into 2004, it is unlikely that Bush will retain his 2000 majority among the active military. Veteran's groups may remain in the Bush camp, but the men and women doing the actual fighting, killing and dying know better and will likely vote for anyone with the common sense to provide them a fast but decent exit from Iraq.

The Costs of Very Low Interest: Fixed Income Stagnating Spending

The second New York Times quote above describes how the historically low interest rates have negatively affected people on fixed income, usually the elderly. This group is beginning to think in a stagnation mode of consumption. Of course if Mr. Bush had been spending that $100 billion now slowly going down the Iraqi rat hole, on drugs or better health care for the aging American population, their willingness to continue to spend might have remained a little higher. And if Mr. Bush had not given those other $100s of billions in tax giveaways to the already rich, and instead had given that money to the middle and working classes, then these groups might be busily spending away, developing enough aggregate demand to have picked the economy up in time for November 2004. But alas, Mr. Bush has done almost the entirely wrong things. Iraq is deteriorating and the national economy is stagnating. November 2004 cannot arrive soon enough.

Is John Kerry the Next FDR?

It remains to be seen what the Democrats will pull together for, but at this time, almost anyone will do. A dead man might well beat Bush in 2004, as John Ashcroft discovered in the 2000 senatorial election in Missouri. Yet, if the stagnation continues, simply replacing Bush and perhaps 20 Republican senators and 100 representatives will not be enough. Some Democrat has to try to step into the shoes of Franklin Delano Roosevelt and begin fighting stagnation again. The job will tougher this time, since there is no likely prospect of a large World War on the horizon, with which to put the jobless to work. Stagnation is back. The only remaining question is whether there is a practical solution which may be used to move the economy away from its grasp and whether the existing Republican Party will remain an obstacle or will try to become part of the solution. In the absence of a bi-partisan solution, the Democrats will have to fight both the stagnation and the Republicans. If that is the way it must be, then so be it. We will complete the economic job of a national, then a global input-out system; which the untimely deaths of Franklin Roosevelt and John Maynard Keynes after World War ll has delayed for over 50 years.