Man Without Qualities

Thursday, April 03, 2003

Wind, Sand, and SARS

There's not too much to say about Paul Krugman's column today, Gun, Germs and Stall? - apparently a sequel to the fanciful best seller The Little Economist, attributed to the Princeton academic, who considers himself a member of what he terms the "tiny elite." That sometimes happens when Herr Doktorprofessor just plagiarizes - er, I mean, "assimilates" - existing material, a phenomenon whose early warning sign is often, as here, his faux-casual observation that nobody has been paying much attention to the purloined (I mean, "assimilated") material. Experts in the complex and subtle field of Krugmania Watching are coming to believe that when Herr Doktorprofessor writes all faux-casual like that he really means that because he hasn't been paying much attention, and now he's had a chance to catch up on the material, he thinks he can swipe it. But that's just theory! Speculation! For now, we will take Herr Doktorprofessor at his word!

Today we learn from Herr Doktorprofessor that over the last two weeks, nobody has been paying much attention to economic news; even the ups and downs of the Dow have reflected reports from the battlefield, not the boardroom.

Now, some silly people might think that all those "ups and downs of the Dow" do reflect economic news. Such people might thinks that news about a huge wind and storm plagued war on sands covering the world's second-largest proven petroleum reserves and right next door to the world's largest proven petroleum reserves in a region long known as a gigantic political tinderbox counts as "economic news." But, look, they seem to use the language a little differently in Krugmania - cut him some slack. "Economic news" is just what comes from the board room there. And Paul Krugman has important things to say when he tells us that "the economic news is quite worrying. Indeed, the latest readings suggest that our recovery, such as it is, may be stalling. ...[T]he committee that rules on such matters still hasn't declared the recession that began in March 2001 over. ... [T]he job situation ... has more or less steadily worsened. ... [T]he latest data suggest that the rate at which things are getting worse is accelerating. In February, payroll employment fell by 308,000 — the worst reading since November 2001. Some analysts suggested that number was a fluke, distorted by bad weather, but yesterday there were two more worrying indicators: new claims for unemployment insurance jumped, and a survey of service sector companies suggests that the economy as a whole is contracting.

Now, it certainly seems as though somebody should have been paying attention to all that quite worrying economic news. Full disclosure: I hadn't previously realized that findings by the committee that rules on recession duration, government unemployment statistics, "data suggest[ing] the rate at which things are getting worse," analysts' suggestion about the weather or surveys of service sector companies actually came from corporate board rooms. In my ignorance, I had previously thought that they came from places like the government's National Bureau of Economic Research, the Bureau of Labor Statistics, various analysts' cubbies and academic economics departments and business schools - and think tanks and commercial economics survey shops. Indeed, PricewaterhouseCoopers only four days ago issued the results of a survey showing widespread CEO anxiety, including lots of economics concerns, and reaching the conclusion: As uncertainty extends its grip on America's next-generation economy, service businesses appear to be on a steadier course than their counterparts in the product sector—with comparatively brighter prospects for industry growth, corporate revenue growth, new hiring, and major new business investments. That conclusion doesn't seem to give quite the spin to the survey that Herr Doktorprofessor does - but, then, he ambiguously suggests that the unnamed (?) survey to which he refers came out yesterday. Herr Doktorprofessor can't be relying on the PricewaterhouseCoopers survey because we all know (he tells us!) that big accounting/consulting firms like PricewaterhouseCoopers can't be trusted further than they can be thrown - but more on that below.

Let's face it: It's a real scandal when a genius like Paul Krugman has to distract himself from all his important pre-Nobel Prize work and tell us that nobody has been paying much attention to the economic news. I, of course, lay this scandal where it belongs, at the feet of President George Bush - although Herr Doktorprofessor is too much of a gentleman to criticize the President. It is the President who is "responsible" for appointing Treasury Secretary Snow to be the main, designated person who is supposed to pay attention to economic news, but isn't, no doubt because he spends all his time on one of those golf courses just as Herr Doktorprofessor had warned would happen:

The administration's credibility problem is made worse by ... the uninspiring quality of their replacements. Today is the first day of hearings for John Snow, the administration's choice for Treasury secretary. One official I spoke to was rueful: "I thought Paul O'Neill wasn't suited to being Treasury secretary; he'd have been better off running a railroad. Now they've picked a man who ran a railroad." But that's not why he was chosen, according to CBS Market Watch: "He was picked because he's a lobbyist, a schmoozer, a master salesman" — and a member of no less than nine country clubs.

Mr. Snow, a clear doofus and mere railroad man, must be one of those silly "optimists" that Herr Doktorprofessor warns today are so off track:

[O]ptimists keep expecting businesses, anxious to update their technology, to resume large-scale investment and create a robust recovery. Both outcomes are still possible, but it seems increasingly likely that consumers will lose their nerve before businesses regain theirs. Optimists now place their faith in the supposed salutary effects of victory in Iraq. The theory is that businesses have been postponing investments until uncertainty over the war is resolved, and that once that happens there will be a great surge of pent-up demand. I'm skeptical: I think the main barriers to an investment revival are excess capacity, corporate debt and fear of accounting scandals. (The revelations about HealthSouth suggest that there is still plenty of undiscovered corporate malfeasance.)

So what the heck was the Wall Street Journal doing when it reported only yesterday:

The U.S. economy's problems go deeper than consumers and businesses cutting back due to uncertainty over the war in Iraq, Treasury Secretary John Snow said Thursday. "The problem is not with the concern about the Iraq war. The problem is the underlying weakness with the economy," Snow said in remarks made at the Marks Street Senior Center in Orlando, Fla. He did not elaborate on what the fundamental problems were. ... Despite Snow's belief that the economy's problems are more profound than just war concerns, it didn't lead him to conclude the economy is on the verge of falling back into a recession. "We need to be guard against it" because "there is clear weakness in the economy," Snow said. In earlier remarks Thursday, Snow argue the best solution for the economy's troubles would be the passage in full of the president's tax-cut package.

Doesn't the Wall Street Journal know that Mr. Snow hasn't been thinking about the economic news in the first place, and, even without thinking about it, that he has mindlessly placed his faith in the supposed salutary effects of victory in Iraq? And what's all this business about the general softness in the economy requiring passage of the stimulating tax cut that the President has proposed - a general softness that looks a lot like the general softness that Herr Doktorprofessor perceives, too? Wasn't it was exactly this general softness of the economy that Alan Greenspan denied in his Congressional testimony, a denial that was seized upon by Democrats as a big reason not to pass the President's tax-cut? Doesn't Herr Doktorprofessor column breath new life into the President's tax plan? Surely that can't be right - since Herr Doktorprofessor doesn't mention of word of this obvious consequence of his observations!

And what was the Journal thinking when it reported only two days ago:

Federal Reserve officials gave divergent views of the economy's prospects once the war with Iraq is over, while indicating a readiness to cut rates quickly if the economy doesn't shake off its current torpor. .... The remarks were further evidence that opinions inside the Fed vary over how much of the economy's weakness stems from war-related uncertainty rather than pre-existing factors such as the investment bust and corporate-governance scandals. But officials agree war is making it difficult to read the economy's underlying trend. ... But, in a break with tradition, it said geopolitical uncertainty made it too difficult to issue its usual assessment of whether inflation or economic weakness posed the bigger risk in the near future.

No wonder the Fed is in such a dither! They're focusing on the war and all that geopolitical uncertainty! Don't they know that those things aren't economic news? Sheesh, we're all in big trouble when the Fed can't even figure out what is and is not economic news in the first place! And now the Journal goes around reporting that the Fed is paying attention to and even concerned about economic news like the investment bust and corporate-governance scandals, even though we know from Herr Doktorprofessor that the Fed (indeed, nobody except Herr Doktorprofessor) has been doing any such thing. And Forbes, too, which recently reported: Uncertainty over war is not the only factor holding back a recovery in U.S. business, said Federal Reserve Bank of New York President William McDonough, citing the damage done to investor and lender confidence by corporate scandals.

Well, lets see. It looks like the Secretary of the Treasury and the Federal Reserve Bank have both been mis-reported to have been paying attention to the economic news, and to be concerned about excess capacity (although they call it the "the investment bust") and fear of accounting scandals. Concerns that individual investors may avoid the markets because of accounting transparency anxieties have also been express by such worthies as Warren Buffett and John Bogle. But those two gentlemen have not to my knowledge claimed that they believe that such investor anxieties have, in fact, resulted in individual investors withdrawing their money from the markets in worrying quantities, or that any company with which either of them is associated has materially reduced its willingness to invest in the market out of such anxiety. Mr. McDonough and Herr Doktorprofessor go further and do claim that accounting transparency anxiety is a current, significant drag on the markets and the economy. However, oddly, neither of them cites a groat of hard evidence for that claim - although it should not be too hard to survey investment companies, securities traders and individual investors to ascertain whether this is a current, real, substantial drag on the economy. And, if such evidence exists, why does most of the Federal Reserve Board not cite to this concern? And while it is true that investors should always be concerned about the risk of bad accounting, there is no need to cite to HealthSouth, because no matter what reforms and controls are instituted, this problem will always exist in abundance - and radical accounting reforms and controls can easily do lots of damage to the markets, the economy and the investing public.

Is Herr Doktorprofessor the first to sound the alarm that American companies have too much debt? Who could doubt the answer? Herr Doktorprofessor has long had a rather complex relationship with corporate debt. As noted in a prior post:

One of the most pernicious aspects of "double taxation" of dividends is that it encourages companies to take on too much debt because interest payments are deductible where dividend payments are not. Too much debt obviously leads to too many bankruptcies. And now this:

The U.S. agency that insures pensions for about 44 million Americans has seen its $8 billion surplus wiped out in one year by growing pension fund failures, and has fallen into deficit, The New York Times reported on Saturday. The Pension Benefit Guaranty Corp. will disclose a deficit of $1 to $2 billion in its 2002 annual report, expected to be released at the end of next week, the newspaper said. ...

Paul Krugman argues:

Twenty years ago most workers were in "defined benefit" plans — that is, their employers promised them a fixed pension. Today most workers have "defined contribution" plans: they invest money for their retirement, and accept the risk that those investments might go bad. Retirement contributions are normally subsidized by the employer, and receive special tax treatment; but all this is to no avail if, as happened at Enron, the assets workers have bought lose most of their value.

It seems to be Professor Krugman's opinion that a threat to the nation's "defined benefits" plans can be no real crisis because most workers today don't have defined benefit plans. ... But it is also Professor Krugman's opinion that workers should have defined benefit plans, which are undermined by excess corporate debt, which is encouraged by "double taxation," which he opposes abolishing.

Herr Doktorprofessor is also concerned about SARS. And here he surely cannot just be filling up column inches with a summary of what he is - and all of us have been - reading in the media. I confess that it must be my ignorance and personal limitations that keeps me from ascertaining and isolating exactly what Herr Doktorprofessor has today contributed to our understanding of the economic consequences of SARS.

But I certainly see what he's getting at when he writes: I also wonder whether victory in Iraq will mark the end of uncertainty, or the beginning of even more uncertainty. Are we on the road to Damascus (or Tehran, or Yongbyon)? Except I can't figure out if he's saying that this particular uncertainty is now preying on the economy. But I am pretty sure that if this uncertainty turns out to be nothing of consequence, Herr Doktorprofessor will be able to say that he never actually wrote it was of consequence. And if this uncertainty turns out to be of consequence, Herr Doktorprofessor will give himself a nice pat on the back for predicting that development, too.

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