Bush defies belief
President preaches to converted while Fed grapples with the real problems
Worth noting that the $80 billion cost of a war in Iraq and the $10 billion a year to maintain a peacekeeping force there for the next six years after such a war would also have a highly significant effect on the US deficit. (Time and money estimates from Jane's defense)
Source: The Guardian
Authors: Charlotte Denny
Dated: 2002-08-15
The world's largest Baptist university was both an appropriate and unfortunate location for the Bush administration to pick for this week's summit on the US economy. To his detractors, the choice of Baylor University in Waco, Texas - half an hour's drive from President Bush's Crawford ranch - reinforces the image of a president too lazy to stray far from his holiday home even for a serious issue such as the economic situation.
But the relentlessly upbeat message from the summit suited Baylor's evangelical surroundings. Invitations to Tuesday's gathering were limited to true believers who spent the day energetically praising the administration's handling of the economy.
Van Eure, owner of the Angus Barn restaurant in Raleigh, North Carolina - one of the "ordinary Americans" invited to the summit - told the president she backed elimination of inheritance taxes, a favourite White House policy. "I'm just honoured to be sitting next to one of my heroes," Ms Eure said.
Revisions
President Bush may have received a warm response in Waco, but he is in danger of going from hero to zero in the eyes of middle America. As their pension savings vanish amid revelations of corporate corruption, workers and investors are becoming increasingly pessimistic about the economic outlook.
Their gloom is shared by Wall Street, where stock prices have fallen by a third since the dotcom bubble burst in March 2000, and the dollar has lost some of its shine. Economists are warning that the world's largest economy is in danger of a double-dip recession.
Last month, the commerce department published revised estimates for growth that rewrote recent economic history. Not only was the 2001 recession deeper and longer than first thought, but America's much vaunted productivity miracle has largely evaporated in the revisions.
Hopes that the blistering pace of growth in the first three months of the year were a sign the economy had shrugged off last year's downturn proved illusory. Most of the rebound was a temporary boost from the turnaround in the inventory cycle. Growth slowed dramatically in the second quarter, with output rising by just 0.3%.
The lukewarm recovery has so far failed to create jobs, adding to fears that consumer spending may falter. Battered by falling markets and the corporate scandals, consumer confidence fell last month to its lowest point since the aftermath of last September's terrorist attacks.
Economists say the willingness of households to keep spending will be crucial to preventing the economy from sliding back into recession. With businesses still writing off billions of dollars of wasted investment during the dotcom boom, consumer spending is the only factor keeping the economy above water.
President Bush's economic team had few serious remedies to offer this week. The summit seems to have been a stunt designed by political advisers for maximum impact on prime-time television, reinforcing the perception that Bush's economic officials are a second-rate bunch without much clout in the White House.
Their proposals - government-backed terrorism insurance, domestic energy exploration and abolition of the estate tax - failed to reassure a market worried about far larger issues such as re-emergence of the federal deficit and America's ballooning trade gap.
Thanks to last year's $1.3 trillion tax giveaway, most of which went to the richest 10% of the population, the White House cannot afford further fiscal easing to help kick-start growth. Meanwhile, foreign investors are pulling out of Wall Street and Main Street, putting downward pressure on the dollar.
As the hand-picked audience assembled in Waco to hear US treasury secretary Paul O'Neill explain how the president's economic agenda would help "each American own part of the American dream", the US Federal Reserve's open markets committee was meeting. Banal slogans were not on the agenda; the Fed's top minds were considering whether the US economy is about to follow the same path as Japan.
The world's second-largest economy has been trapped in a deflationary spiral since the collapse of its property market 10 years ago. Policymakers at the Fed are worried that the dotcom implosion could cause a similar bout of deflation in the US.
Falling prices might sound like a central banker's dream but in fact deflation is far more damaging and harder to control than inflation. With prices always falling, there is no incentive for consumers to go out and spend - goods will be cheaper next week. The entire economy suffers the equivalent of a bout of negative equity. Anybody with outstanding loans is in trouble, because the nominal value of their borrowing stays the same.
Prices in America are still rising but at their slowest rate in 40 years and the Fed takes the threat of deflation very seriously. A paper by senior Fed economists published last month warns that bouts of deflation can surprise forecasters.
"The failure of economists and financial markets to forecast Japan's deflationary slump in the early 1990s poses a cautionary note for policymakers in similar circumstances: deflation can be very difficult to predict in advance. In consequence, as interest rates and inflation rates move closer to zero, monetary policy perhaps should respond not only to baseline forecasts of future activity and prices, but also to the special downside risk - in particular, the possibility of deflation - to those forecasts as well."
In other words, better to cut rates and risk a little extra inflation than let the economy slide into deflation.
The lesson, they conclude, is that the Japanese authorities should have acted earlier and with greater vigour to prevent prices falling in the early 90s. But so far it has failed to prompt the FOMC into action: at its meeting this week, the committee kept rates at a 40-year low for the eighth month in a row.
Two factors probably lie behind the Fed's over-cautious approach. A rate cut might have alarmed already nervous markets by revealing the extent of the Fed's concerns about the outlook.
Fiscal laxity
The second is that the Republican administration's lurch into deficit has boxed in the Fed. With fiscal policy already loose, the Fed feels constrained about delivering more stimulus to the economy through lower borrowing costs.
The tax cut which the administration hailed as saviour of the economy last year now looks like a major policy error. If the recovery continues to be sluggish, the government cannot increase spending or cut taxes further to help get the economy moving without being punished by the markets for fiscal laxity.
Most economists expect the Fed to cut rates later this year. However, the monetary authorities are running out of ammunition: with rates already at 1.75% there is not much more the Fed can do.
The next few months will be a testing time for the US economy. President Bush may believe that the country's underlying strengths are greater than the challenges ahead. For his advisers, the real worry must be that the phrase which sank Bush senior's re-election chances - "It's the economy, stupid" - will prove equally damaging to his son.
---- This message was posted by Hermit to the Virus 2002 board on Church of Virus BBS. <http://virus.lucifer.com/bbs/index.php?board=51;action=display;threadid=26105>
This archive was generated by hypermail 2b30 : Sun Sep 22 2002 - 05:06:19 MDT