Sunday, July 20, 2003

Come on aboard, I promise you it won't hurt the horse -- there's lots of room for you on the Bush/Snow bandwagon!

It seems that the President is doing such a bang up job convincing Americans that the war in Iraq is going swimmingly, he's decided to convince us all the US economy is going gangbusters as well. The Washington Post describes it as a "month-long economic sales tour". After this Bush will really need that traditional month-log vacation at his ranch in Crawford.

The apparent meme for this trip has been set out by the President already:
"There are hopeful signs that our actions are contributing to economic growth," Bush, who is spending the weekend at his ranch, said in his radio address today. "Now that Americans can keep more of what they earn, we can expect to see rising demand for goods and services. And as demand increases, companies will need more workers to meet it."
Let's see here. The Bush economic logic says low pay makes for low consumer spending makes for low employment and low economic growth. Stunning in its simplicity -- and like most of what comes out of Bush's mouth these days, stunningly wrong. Or should that be "exaggerated"?

The usual pattern for consumer spending is to fall during recessions and then explode during recoveries, reflecting the impact of unemployment and lower earnings during recessions and pent-up demand during recoveries. This is just the pattern in the early 1980s, when consumer spending actually fell in 1980 and rose barely above 1% annually in both 1981 and 1982. In the next three years, consumer spending rose over 5% each year. We see the pattern in the Poppy Bush recession, too, although with the delayed consumer spending recovery due to the now-familiar "jobless" US recoveries. Growth in consumer spending was under 2% in 1990 and actually fell in 1991. From 1998-2000, however, consumer expenditures rose over 4% each year.

What has made this most recent recession so strange is that consumer spending never really took a serious hit. In 2001 real personal consumption expenditures rose 2.5% and in 2002 rose 3.1%. Thus there is no real pent-up consumer demand to drive a recovery from this largest chunk of the economy. Americans have been spending their tails off, recession or not.

So when Bush starts to look for a demand-led recovery, the man is fooling himself. We all know the Bush tax cut package will put very little money into the pockets of average folks, and the rise in taxes at the state and local level has more or less cancelled out any stimulus the federal tax cut offered. Besides, this voodoo economics didn't work under Reagan and it won't work now.

Consumer spending is not going to drag this economy out of its rut short of handing out bags of money at Wal-Mart. The housing boom is already cooling considerably in the face of rising interest rates. Exports won't do the trick, either. It's up to either capital investment or government spending. Capital investment looks pretty unpromising in light of the continuing dramatic underutilization rates of US industrial capacity. Maybe we'll spend our way to prosperity by rebuilding Iraq and Afghanistan?

As you can see, the options don't look good. Public works and a real tax cut package designed to benefit the working class is the only real shot, but with this administration in power, don't hold your breath for recovery.

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