Man Without Qualities

Sunday, November 09, 2003

On The Habitation Of Fox Holes on Forty Third Street

Just before the recent 7.2% estimate for third-quarter GDP growth was released, I made a prediction:

If the third-quarter numbers come in north of 6.5%, the official Man Without Qualities advance estimate of fourth-quarter HDP (Herr Doktorprofessor) trends is a distinct falling off in the number of HDP columns arguing that unemployment and a "jobless recovery" will be the big problems for the President's re-election, and a growing dominance of HDP clarion calls that the "collapse of the bond markets" will do him in - notwithstanding the employment growth previously considered all-important by a handful of economists.

That hasn't happened yet. But the Times itself is already leading the way with today's editorial:

Alan Greenspan may be in for a rough election. ... The quandary facing the Federal Reserve will not be how much or how fast to cut, but how much and how fast to raise, its crucial overnight interest rate, now at a 45-year low of 1 percent. Just two weeks ago, the Federal Reserve opted to leave that rate unchanged, and it issued a statement suggesting it would not act for a "considerable period."

But the ongoing flurry of positive economic data should force Mr. Greenspan to shorten his time horizon. Since the Fed spoke, we have learned that the economy grew at a blistering 7.2 percent annual rate in the third quarter. Manufacturing, construction, corporate profit, consumer spending and productivity numbers have all been impressive.

Most significant, the economy is finally adding jobs after being battered by the overhang of the popped Internet bubble, terrorism, corporate scandals and the war with Iraq. More than a quarter-million jobs were created in the last two months, according to figures released Friday, and plummeting new claims for unemployment benefits suggest the labor market will only get stronger. ... Nobody is yet suggesting that these are the best of times. The country will be hard pressed to regain anytime soon the 2.5 million jobs lost during the Bush presidency.

And so it has come to pass that the that New York Times can now describe the late Clintonian era as a "popped Internet bubble" with an "overhang" that has "battered" the economy since George Bush took office - but only a sentence later hold the current President to account for "the 2.5 million jobs lost during the Bush presidency."

This leaves the Times apparently suggesting that the Bush Administration should be faulted for not creating its own "bubble" - or at least an aggressive expansion - whose risks are worth it as the only way to restore "the 2.5 million jobs lost during the Bush presidency."

But appearances here are deceiving. This Times editorial is all in a dither over exactly the opposite of the appearance noted above. Here, the Times fears that the Fed will not raise interest rates fast enough to stop a "bubble" from forming - there is no mention of jobs.

There is also no mention of the complete lack of reported price pressure throughout the economy. Nor does the Times tarry even a moment here over that interesting and gigantic nonfarm business productivity surge at a seasonally adjusted annual rate of 8.1% from July through September - a pace that was the fastest since the first quarter of 2002 and an acceleration from an already-robust 7% clip in the second quarter of this year. Most educated people would wonder whether such a historically huge jump in productivity - one that extends well into the services sector once thought to be all but immune to such things - might have some effect on the Fed's need and inclination to raise short term rates. But not the Times. Not here. It is interesting that the Times editorial rejects most qualifications as to the positive significance of the economy's recent and likely future performance. Is that at least a faint glimmer of intellectual honesty?

It is perfectly possible to be legitimately alarmed at recent Fed policy from an inflationary standpoint. The Fed chooses to concentrate on certain factors in gauging inflationary risks. Some highly talented observers think the Fed chooses the wrong factors. But the Times identifies no such argument here. Instead, we are presented with a broad-brush, crude implicit Phillips curve argument.

The argument advanced by the Times does not even make sense from the standpoint of basic timing. The 2004 election is one year away. Even if every one of the Times concerns is correct, the Fed will not be under serious pressure to raise rates for several months - that is, nine months before the election. (The Times admits: You can expect the Fed to prepare markets for the turnabout when it next considers rates in December, and then to take action in the spring.) Even at that point, it is highly unlikely that the Fed will be under pressure to effect dramatic rate increases. And modest rate increases are generally believed to take twelve months to have their effects, anyway. Is the Times suggesting that a modest interest rate rise put through by the Fed in, say, May 2004. is going to have some effect on employment in October? It won't.

In sum: The great bulk of whatever effect Fed policy is going to have on the November 2004 election is already in place. Unless the Fed effected a truly dramatic increase in rates in the next month or so - which is highly unlikely - any rate increase the Fed does decide upon will not work its way through the economy until after November 2004.

So what the heck is the Times thinking about?

On a more personal side, how could Alan Greenspan realistically be made to feel serious pressure? The man was reappointed to a full 14-year term beginning 1992 and was born in 1926. Does the Times think Dr. Greenspan is angling to be reappointed to another 14-year term in 2006 - when he will be 80 years old?

The Gray Lady seems increasingly frantic in her efforts to find some reason - increasingly, any reason - why the Democratic crack-up likely coming in November 2004 just won't happen ... just can't happen .... and please, dear God, don't let it happen .... except they don't much believe in God at the Times.

Well, maybe they'll start believing more soon. There's an old saying about atheists in fox holes.

UPDATE: As is so often the case, Steve Antler and Don Luskin and Bruce Bartlett and Maguire all make a lot more sense than the Times.


Bruce Bartlett identifies the Times probable agenda here:

I do not believe that the Times is particularly concerned about inflation. ... The goal is to prepare the ground for Democrats to adopt a Ross Perot-like obsession with fiscal responsibility that could undercut President Bush's support among swing voters. It will also serve to soften the left-wing image of Howard Dean, the likely Democratic presidential nominee, by giving him a conservative issue to run on.

Mr. Bartlett provides some good reasons why the Times-Democratic strategy is a likely loser. And Holman Jenkins writing in the Wall Street Journal does a very good job of explaining why this new Democrat-Times attempt to to relive 1992 is probably just so much empty liberal nostalgia:

Let's talk about the new Democratic Party economics, which we might call Krugmanomics: a combination of deficit dread and demands for higher taxes on the rich.

Politically, voters care about budget deficits only when they feel insecure about their own jobs. The deficit then becomes an emblem of economic mismanagement (never mind the Keynesian wisdom that a growing deficit is desirable when the economy is slack, providing countercyclical demand).

Likewise, voters never crave tax hikes but are most receptive to tax hikes aimed at the undeserving rich when their own economic anxiety is high.

This is extremely unpromising fodder for a party that wants to get elected to majority status more than once every 40 years or so. By now you can already see the problem with Krugmanomics: It appeals only on the downside of an economic cycle.

In 1992, the Democrats got lucky with the business cycle--no small feat, because getting lucky is becoming harder for the party out of power to do. Growth periods have been getting longer; recessions have been shorter, shallower and further between. You really have to nail it to have an election coincide with the gloomy times when Democratic appeals work best.

It's interesting that Paul Krugman's name keep coming up - even though he has not yet piped up. There may be a good reason for that, a possibility that I want to explore in a future post.

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