For the last year I have been saying what should be obvious - we are in the boom phase of the Bushconomy. Let me explain, there is an anatomy to the rise and fall of business activity - called "the business cycle". It is one of the great mysteries of economics, because micro-economics doesn't explain it - instead there should be constant jerking and wobbling around a center. Keynes and Schumpter had theories of it - Keynes' famous "animal spirits" being a famous phrase.
Let's go over the cycle - there is a contraction, after a trough there is a possible rebound - a fast period of returning people to work and high GDP growth. Then there is a crisis point where either the economy has worked through whatever caused the contraction in the first place - in which case there is a landing as resources are put to work in the new area of business - or there is a new contraction. After the landing comes an expansion, where the economy grows to fill the new space. Then there is a boom - where the economy starts to overheat again, creating a new bottleneck and setting up the next contraction.
Monetary policy centers on making the contractions as shallow as possible, and preventing overheating which causes inflation. Greenspan has generally been good about this. But to work through bottlenecks, and to create new space which is as rich and large as possible is the result of other economic policy - fiscal policy and international agreements as well as regulation and government investment. This is the area where the US has fallen down repeated. In effect, Greenspan played his hand well, but very often had a partner across the table, one named Bush, who couldn't give him much to work with. That is why Clinton plus Greenspan did well - Greenspan kept inflation down and growth good, and Clinton's policies opened up trade and high tech to take advantage of the friendly environment.
This economic cycle is not well described because of political manipulation by the National Bureau of Economic research, in a shameful move that changed the rules of determining recessions in order to make the 2001 recession end early. By the old rules - which included wages - the recession would have dragged on into 2003, or been a double dip recession with bottoms in 2001 and late 2002. Either way, the old rules describe the arc much better: the government spending induced rebound comes in 2003, as Iraq war spending and the ending of uncertainty about the invasion and lowered energy prices kicked off a big burst of GDP growth, and a reasonable burst of hiring - an kind of C- level of job growth that we have followed since then.
Taking the recovery this way, we haven't had the worst recovery in post-war history, but, instead, one of the longest recessions, followed by a relatively D+ war time expansion. Q3 2003 was the rebound - with the highest GDP growth in years for a single quarter - and high 3% GDP quarters in an unbroken string since then.
The "landing" began with the Fed's tightening cycle, but, because the Fed raised interest rates too slowly, inflation set in. Now there is disagreement on whether the Fed acted too quickly or too slowly. Many liberal economists wanted interest rates to stay lower longer. And, if there were a reasonable executive in power, people like Brad DeLong would be right - lower interest rates would make the Iraq war cheaper to pay for long run, and good fiscal and regulatory policy would be used to keep inflation in line. We are, after all, at war, and this is perfectly normal war time policy - keep interest rates low, but keep a lid on growth to prevent inflation until after the war is over. Then there will be a strong post war expansion fueled by lower interest rates later - because the federal deficit will be lower - and "pent up demand". That is people buying what they could not during the war.
Instead Bush chose to follow the "war profiteer" model - allowing growth associated with the war to go unchecked, paying out higher interest, and leaving the economy loaded with debt, beset by rising commodity prices and positioned for a period of economic sub par growth afterwards to pay off the war. It is a very 19th century way of doing business. Perhaps he is a closet marxist and thinks that if workers are shafted hard enough they will rise up. He is certainly a right wing socialist, since the growth in this economy is all stimulus induced.
Back to the Bush boom then. During a boom GDP growth is good. However, it is not always good for workers. Sometimes, if labor is in short supply, real wages go up quickly - for example the Clinton Boom of late 1998 to early 2000. However, sometimes inflation eats away at the gains as fast as they are made. People were unhappy in the Carter boom year of 1979 because while the economy was creating a lot of jobs, wage growth after inflation was very poor, and chronic high interest rates made it hard to get ahead.
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The Bush Boom is not labor short, in fact, the opening of China and India is creating not just a labor surplus, but a surplus of something that has been in short supply chronically for 25 years - skilled symbolic workers. China doesn't just make car parts, it has engineers. India doesn't just have call centers, it has programmers. The current boom is good for people who are connected with defense industries - as the Reagan-Bush boom of 1988-1989 was - but it is creating a much larger problem.
That larger problem is this. Why would a boom ever end? Because at some point the inflationary expectations give out. Either something that was supposed to go up in price didn't, or something is going up in price fast enough to eat all the profits.
Let's look at the Reagan Boom, since that one has played out and we have some 15 years of hindsight. In 1986 the economy had a hard landing, GDP contracted, wages and jobs slowed. It wasn't enough to cause a recession, but it did have a cascade effect. That effect was this.
- Oil prices and other commodity prices dropped like a rock in 1986. Good news long term, but....
- Investments, particularly by Savings and Loans and insurance companies in high commodity prices turned sour. The boom for much of the US was "the oil bust" for Texas and the Oil patch. Overnight the "let them freeze in the dark" bumper stickers were replaced by "please god, just one more oil boom, we promise not to fuck it up" bumperstickers.
- Monetary policy, still trying to wrestle down inflation remained tight, making the insolvent institutions go bust. Corruption played a big role in kicking the can down the road. Greenspan's biggest screw up was to ignore the problem.
- The Crash of '87 forces easy monetary policy. This is a frequent effect - that bailing out the financial effects of the landing period forces overly easy moentary policy. It is repeated in 1997-1999, and has precursors in other cycles, including the Johnson Boom and the Coolidge Boom.
- Monetary policy stays loose, allowing the pillaging of otherwise bankrupt institutions as rats sneak off the sinking ship.
- Finally when the S&L Bust happens, and inflationary effects of bail out monetary policy hit, the Fed must tighten at the same time that the Federal government retrenches - tax increases and massive defense spending cuts.
Thus endeth the boom. Looking at the Reagan years the six really good economic years of 1983-1989 were followed by six sub par years of 1990-1996. Over all, there was no net gain. This is monetary theory - there is no such thing as a free lunch. One can merely shift gains from one time to another. The idea is to shift gains that would otherwise be inflationary to times when gains cut down on deflation. In a sense borrowing money cheaply to be paid back when money is easy.
The Bush boom is not a replay of the Reagan Boom period, its landing period has been short, but it has touched off a financial crisis in the making - the looting of pension funds. This makes sense - eventually every financial fuck up will come to rest with the government paying it off, because the government and only the government has deep enough pockets, and the ability to force people to pony up. This is why we tax the rich - because they get the massive benefit of "financial fuck up insurance", which, frankly, no private entity would sell. Progressive taxation is the insurance premiums for this financial fuck up insurance.
The Bush boom is based, as the Reagan boom was, on government spending. The Reagan expansion was essentially the US fighting a war without a war. The Bush boom has the US spending a great deal more on a small war than it actually is using to fight the war. The present bump up in GDP is from a huge hit of government spending on Katrina reconstruction plus a continued big flow of money from Iraq.
The role of the revenue reductions that Bush and the Republicans passed is important. They are not generating net growth. Once you take out the effect of government borrowing, easy monetary policy and government spending on the war, there is a net negative number left. That is revenue reductions do nothing to create growth, but they do decide how the growth gets distributed. In this case, since the privileged got the tax cuts and the access to the government spending, they are getting the growth. The rest of us are seeing housing inflation - which some people are cashing out of - as the only real benefit of the Bushconomy.
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So what is happening is a pillaging of the financial system, as people at the top "profitize" assets and turn them into personal income. The result will be a pension crisis - because workers can't really vote their shares - which the government will pay for. The next President if he or she is smart, will precipitate this crisis early, to make paying it off cheaper. The other problem is high energy prices, as people have poured their saveable income into "buying the biggest house they can". What is needed is low, low, low, low interest rates - without energy inflation that has gone with them.
The answer then is to shift the incentive from pouring money into McMansions, and back into equities. We need a stock market boom. This will make paying off the pension system easier because
- Lower interest rates mean cheaper borrowing.
- Early is better because we can use the remaining period of China buying US treasuries at any price to accomplish the bail out.
- A stock market boom allows the pension problem to be unwound, since pensions can move into equities.
The pillars of this:
- Force pension reform, accept the cost, and the economic down turn.
- Raise capital gains taxes, and make an agreement with other major nations to place a tax on currency transactions - in effect restricting capital mobility.
- Restrict energy consumption with a gas guzzler tax, higher gasoline taxes - but delicately to prevent a bust of airlines and automotive, which would make the pension crisis worse.
- Subsidies to allow Detriot and the airline industry to shift to a more energy efficient stance - but helped by the increasing flow of equity money.
- Large increases in the incentives to save as pension and retirement money - say doubling the IRA limits, and ending the deduction for health insurance for corporations, but give back the same money as retirement tax credits. In effect make it easier for companies to compete for labor by offering better retirement savings rather than better health insurance.
- Universal, Single Payer health system with strong cost controls to prevent health inflation.
These pieces are well understood by the left, but that they fit together as one package - keep money in the stock market system, force a shift of the economy away from housing and health inflation, and pushing interest rates back down by inflation control - has not been well enough explained.
The alternative is a bigger, badder, longer, replay of the early 1990's and early 2000's - a long wallow in the trough of low hiring and low or no wage gains. We seem to be lining up to vote for this in the form of "McCainism" - let the privileged loot, more revenue reductions to pour gas on the inflation fire, and no reform of key sectors of the economy and the pension system.
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The short term is this: if you can cash out, cash out. Now is a great time to decide to sell the bi-coastal house and move. Work as much as possible, and shave down debt - because policy may not be good. And as Scott Bateman's latest says Vote Liberal.