T Nation

Let's focus on the Economy

First, jobs:

Here’s the latest jobs report:

Some interpretation:



As Ramesh reported, the economy added 144,000 nonfarm payroll jobs in August with the unemployment rate falling to 5.4 percent, its lowest level since October 2001.

Some more jobs details: The latest payroll jump is the most since May, is the first acceleration in hiring in 5 months, and marks the 12th straight month that payroll jobs have climbed. July payroll numbers were also revised upward from 32,000 to 73,000.

Election-year trivia: The unemployment rate at the same time in 1996 while Clinton was running for his second term was 5.1 percent – 0.3 percent lower than it is today (although by the end of that year the rate had climbed to 5.4 percent, just where it is today).

Assessment of the latest jobs numbers: Fine. Bush should talk the rate (which is historically low); the media will talk the payroll numbers (overlooking the Labor Department?s household survey, which according to our David Malpass is ?more representative of the economy than the [payroll] survey?); and the Kerry camp will continue to call all job increases ?unacceptable,? will discuss jobs lost since Bush took office (and weathered the Clinton recession, 9/11, corporate scandals, and the war on terror), and will never mention the unemployment rate. (NRO Financial?s Jerry Bowyer has pointed out that ?the nation has historically focused on the unemployment rate when it comes to measuring the health of the jobs market.?)

Early jobs buzz: The financial press is having trouble spinning this one negative. Their best thumbs-down talking point is that the payroll figure is lower than the consensus estimate (which was only a few jobs away at 150,000). Some are even saying that the latest Labor Department figures are a sign that the economy is pulling out of its summer slump.

Final overall assessment: Bush can ride this.

Posted at 09:52 AM

Now, economic expectations, from the August survey of economists by the Wall Street Journal:

The 55 economists queried in the August forecasting survey on average expect GDP growth of 3.8% in the third quarter, down sharply from the 4.4% forecast in June. But they see fourth-quarter growth at 4.1%, down only slightly from their previous forecast of 4.2%. The economy grew at a 3.0% rate in the second quarter.

Most expect the “soft patch” in the economy, as Federal Reserve Chairman Alan Greenspan put it, will last three months or less. And, it hasn’t changed their view on interest rates: They still expect the Fed’s target for the federal-funds rate to rise to 2% by year end, up from 1.5% currently.

Economists are slightly less optimistic about jobs, expecting 194,000 nonfarm jobs to be created each month over the next year, down from their May estimate of 207,000 a month – but well above the actual July gain of just 32,000. Most say a sustained drop in energy prices and an improvement in the labor market are needed to revive consumer spending.

I think this stuff cuts for Bush – historically low unemployment numbers combined with economic growth, accelerated hiring, and still hisorically low interest rates. Anyone have a different interpretation?

Some more good stuff, undermining the criticism about “McJobs”


Michael Moskow on wages and the current economic recovery

As the economy began to generate positive (but not stunning) job growth, and as data on jobs lost due to offshore outsourcing came out,
claims that outsourcing or globalization more generally were having a massive job-destroying effect began to ring hollow.

At this point, much of the criticism shifted to the quality of the jobs being created. Even if employment is on the rise, the argument runs, if all the jobs are at Wal-Mart then it’s a very hollow recovery. Since even trade theorists acknowledge that an open economy does affect the composition of jobs that are created, and since the numbers suggest that more low-wage jobs were being created than high-wage jobs, this is a critique that cannot be easily dismissed.

On this point, Federal Reserve Bank of Chicago president Michael Moskow has a Financial Times op-ed today (subscriber-only) on whether this economic recovery is different from other economic recoveries in terms of the mix of jobs that are created. The highlights:

[Begin FT excerpt]A great deal of public debate has focused on the wages for jobs created since US employment finally began to grow in earnest this year. Since real, or inflation-adjusted, wages are the key to how fast living standards improve, they deserve scrutiny. However, much of the recent analysis says little about the long-term prospects for wage growth or the policies that would support faster wage growth.

Daniel Aaronson of the Federal Reserve Bank of Chicago has found, as several analysts have, that job growth in the last six months has been slightly more concentrated in low-wage industries. But Mr Aaronson also points out that the mix between high- and low-wage job growth is tied to the business cycle. High-wage job growth tends to be more rapid than low-wage job growth when labour market conditions are strong; the reverse is true when labour markets are weak or in the earlier stages of improvement. We have every reason to think this normal business cycle pattern will continue.

Rather than focusing on the wage mix of jobs created in the past half-year, we should keep our eyes on more important factors while assessing the prospects for real wage growth. Productivity is the main driver of wage growth. The news here has been positive: productivity growth has been very strong over the past decade and is likely to remain solid. This bodes well for average real wage growth.

But not all US workers have benefited equally from increases in productivity. Workers with more education and skills have generally seen their real wages rise substantially; those with less education have seen little increase and perhaps even a decline.

Much of the increase in the wage premium for education and skills is due to technological change that has increased demand for highly educated workers. Another portion is due to factors such as deregulation and globalisation, which have increased competition in both product and labour markets. Workers with only a high school education were once able to find jobs in industries so insulated from competition that they could expect a lifetime of secure employment and high wages. But such jobs are disappearing....

We must improve the graduation rate. At-risk children need special resources, and research suggests that the benefits to society from investment in these children can be sizeable. But additional spending is not enough. We must develop appropriate standards of accountability for teachers, with incentives properly designed and high achievers rewarded. We must also find ways to inject more competition into the education system.

Human capital investment is not limited to schools. Cognitive and non- cognitive skills development begins at birth and continues well after we turn in our last exam paper. Early intervention programmes can help children get off on the right foot - especially in economically disadvantaged neighbourhoods. And in our dynamic economy, in which technology, international trade or other developments can displace even good workers, retraining needs must be met. The record of government-sponsored training programmes is far from uniformly positive. Still, it will be increasingly important to provide retraining that is efficient, effective and sensitive to labour market needs.

By training workers, rather than protecting jobs, we can take full advantage of the gains from technological advance and international trade. Researchers continue to evaluate society's investments in human capital. Even in an age of sizeable budget deficits, we should invest in programmes for which this research shows the benefits clearly outweigh the costs. [End FT excerpt]

Here’s a link to the FRBC press release of the paper by Daniel Aaronson and Sara Christopher, http://www.chicagofed.org/news_and_conferences/news/2004_08_05_job_creation_examined_in_september_fed_letter.cfm

and here’s a link to the actual paper http://www.chicagofed.org/publications/fedletter/cflseptember2004_206.pdf

The key paragraph:

[Begin excerpt]We find that the share of job growth in higher-paying sectors typically responds favorably to overall employment growth and, conversely, falls when labor markets weaken. Recent history falls squarely in this pattern. Recent estimates of higher-paying industry job growth have rebounded over the past year and currently stand about where we would expect given the state of the labor market. [End excerpt]

Anyone want to discuss trade policy? It will affect your standard of living a lot more than Viet Nam era stuff (as interesting as that is):

Muddled and Maddening

September 13, 2004; Page A20

Now that his handlers want John Kerry to change weapons, in the midst of a presidential duel, from Iraq to the economic rapier, it’s safe to say that they think this sets him up to inflict a fatal wound. That may well be so. Yet on trade policy, on which Howard Dean cut his teeth without gaining a cutting edge and Dick Gephardt made his last stand, one can only gasp at Sen. Kerry’s gaffes.

How does one forgive him his pronouncements on outsourcing, and his strange silences on the Doha Round of multilateral trade negotiations? Indeed, Sen. Kerry, whose views and voting record were almost impeccable on trade, has allowed himself to be forced into such muddled and maddening positions on trade policy that, if one were an honest intellectual as against a party hack, one could only describe them as the voodoo economics of our time.

There seem to be three arguments by Sen. Kerry’s advisers that have prompted this sorry situation for the Democrats: First, that the Bush trade policy is no better; second, that electoral strategy requires that Sen. Kerry act like a protectionist, while indicating subtly (to those that matter) a likelihood of freer trade in the White House; and third, at odds with the previous argument, that the U.S. does indeed have to turn trade policy around toward some sort of protectionism (and restraints on direct investment abroad) if it is going to assist workers and reward the unions. Each argument is flawed.

  • Mr. Bush is no better. Yes, there are commonalities on trade in both parties, not just during the elections. They both espouse “free and fair trade.” But, except for NGOs like Oxfam – which profess trade expertise that they manifestly do not possess, and do great damage in consequence to poor nations – every informed trade expert knows that when “fair trade” is invoked, it is code for (unfair) protectionism in the shape of anti-dumping actions against successful rivals, often from the developing nations.

Both parties, and both candidates, have backed actions against “unfair” trade. The 2004 Democratic platform promises that Sen. Kerry will create new jobs by fighting for “free, fair and balanced trade,” whereas the White House Web site promises that “Free and fair trade helps create jobs by opening foreign markets to American exports.” Both candidates ask for “level playing fields” or else tough retaliatory action – pretending of course that the U.S. is on higher ground morally but on lower ground in the war for markets – and that the other party is soft while it will act tough.

The truly disturbing sin of commission of the Kerry campaign, however, has been to surrender to the hysteria over “outsourcing.” And he has made at least two howlers that would make my first-year students blush a shade of beetroot.

First, outsourcing fears have arisen over what economists call “long-distance,” or arm’s length, services – which can be transmitted over “snail-mail” or over the Internet without the provider and user of services having to be in physical contact. Call-answer services operating in Manila instead of in Minneapolis; the reading of X-rays taken in Boston, via digital transmission, by radiologists in Bangalore; and tax filings prepared in Mumbai rather than in Manhattan, have produced a scare that service jobs will move offshore.

But all available estimates show that, so far, the offshore outsourcing of arm’s length services has resulted in a loss of no more than 100,000 jobs annually. It is ludicrous to be alarmed by this minuscule number. One ought to face with equanimity a figure even tenfold, although the best estimates predict the annual flow over the next decade to double at worst. Nor should one forget that the U.S. itself benefits from others outsourcing to it in medical, legal, accounting, teaching and other high-value arm’s-length services. The net effect on jobs due to such outsourcing is almost certainly a net gain for the U.S.

Second, Sen. Kerry has muddled matters by confusing the outsourcing of services with the altogether different issue of direct foreign (i.e. equity) investment by U.S. firms. Dell may outsource problem-solving calls to Bangalore but may buy those services from an Indian firm like Infosys: that is simply trade. But direct investment is different; it occurs typically when a firm in Nantucket closes shop and moves production to Nairobi.

Sen. Kerry went so far as to describe firms that invested abroad as “Benedict Arnolds.” The silliness of this charge puts him in the same camp as Lou Dobbs, whose outpouring against sundry forms of imports and outward investment is a farrago of nonsense, offered by him with a list (on his CNN program) of traitor firms that “ship jobs abroad.” As I contemplate his slip of a book titled “Exporting America,” and subtitled “Why Corporate Greed is Shipping American Jobs Overseas,” I think to myself: If firms that buy cheap abroad suffer from “corporate greed,” is Mr. Dobbs – whose girth and success doubtless suggest that he buys for his supper French brie and Burgundy rather than Milwaukee beer and Kraft cheese – to be accused by the same logic of “shipping jobs abroad” because of “Personal Gluttony”? (What is sauce for the corporate goose must be sauce for the journalist gander.)
? The Doha Round. Sen. Kerry is also not good news for the critical multilateral trade negotiations in the Doha Round. Where President Bush has articulated strong support for it, Sen. Kerry has ducked the issue. Then again, on top of the strange commitment to have a 120-day review of existing trade agreements (which presumably include the WTO), the Kerry-Edwards demand that labor and environmental requirements be included, with sanctions, in old and new trade agreements, clearly aims a dagger at the heart of Doha.

For while little countries doing bilateral Free Trade Agreements with us will roll over and accept almost any conditions in exchange for preferential access to our huge market, this will simply not happen with the large developing countries that see, correctly, the protectionist hand of lobbies, including unions, behind the demands for labor and certain environmental requirements. There is no way that the mildly left-leaning India of Sonia Gandhi, and even the Brazil of Lula – indisputably a more credible union man than any we produce – will turn away from their longstanding objections and accept such restrictions, either in bilateral FTAs or at Doha. Has Sen. Kerry really thought this through? Also, a Kerry administration will have to cope with its protectionist and anti-trade constituencies which demand such restrictions, and with its own trade-unfriendly rhetoric. And if the Doha Round negotiations are to continue credibly through 2005, a President Kerry will face the problem of the expiry of fast-track authority extension beyond mid-year. It is hard to imagine how he will cope with this problem.
? Can Kerry Turn Free Trader? In the end, Sen. Kerry cannot totally jilt his constituencies. He will have to claw his way to freer trade, making him a greater hero in a war more bloody than Vietnam. The unions, in particular, are going to insist on their reward. This is forgotten by the many pro-trade policy advisers and op-ed columnists who argue privately that we should not worry – because Sen. Kerry is a free trader who has merely mounted the protectionist Trojan Horse to get into the White House. The irony of this last position is that it is, in fact, too simplistic. Besides, it suggests that when President Bush does the same thing, he’s lying, but that when Sen. Kerry does it, it’s strategic behavior! Is it not better, instead, for us to tell Sen. Kerry that his trade policy positions are the pits – before he digs himself deeper into a pit from which there is no dignified exit?

Mr. Bhagwati, University Professor at Columbia and Andre Meyer Senior Fellow at the Council on Foreign Relations, is the author of “In Defense of Globalization” (Oxford, 2004).

Jobs? Anyone?

Good Jobs at Good Wages
September 17, 2004; Page A14

Several months of growth have blown away most of the Chicken Little stories about a “jobless recovery,” but one doubt has lingered. Many Americans believe that service-sector “offshoring” means that the number of high-paying jobs is flat, while companies are creating more menial positions.

Well, even that myth has now been shattered. A new paper from the Chicago Federal Reserve Bank analyzes government employment numbers and finds that growth in jobs paying more than the mean now outstrips the creation of jobs on the bottom end of the bell curve. Moreover, the timing of this shift is in line with the pattern of past economic expansions.

The big problem in analysis is that the data you have to work with are aggregated into broad categories. Partisans can generalize the data to get the answer they’re looking for. For instance, when the Chicago Fed looked only at the 14 “supersectors” of the economy, 72% of the employment growth in the first half of the year was found in those areas with above-average wages, even though these account for only 65% of total employment. But when the Fed economists separated these into subsectors, only 41% of the growth was in job categories paying more than the mean.

Yet using either method, the Fed economists found that the trend line is clear: The U.S. employment market is now in positive territory, creating more higher paying jobs. Moreover, it is entirely normal for this to happen a couple years after the end of a recession, as it did following the previous four recessions.

The CEO of a major retailer told us recently that he scoffs at the idea that good jobs are harder to find. How can he be so sure? First, because average wages are rising. Government data show that in the year leading up to last July, wage and salary income grew 4.4%, while personal income was up 4.9%. Not only that, the median weekly wage also rose – as of the second quarter, it outstripped inflation over the previous year by 1.1 percentage points.

No doubt this new evidence won’t quiet the worriers. John Kerry is now arguing that the job market has squeezed the middle class. Others fret that the American consumer has kept the economy going by taking on inordinate debt. But again, there is no evidence to support these claims. As economist David Malpass of Bear Stearns replies, “Spending has been resilient due to job growth, the [5.4%] unemployment rate, income growth and high levels of household savings and net worth.” Yesterday the Fed announced that household net worth hit another new high in the second quarter, while debt growth has begun to slow.

All of this good news won’t please protectionists who have staked their reputations, or their Nielsen ratings, on the proposition that trade with Bangalore is driving Americans into poverty. The business cycle is still the best explanation for temporary setbacks in job creation. Meanwhile, trade continues to increase the buying power of American consumers. The one surprising thing about this expansion is how vigorous it remains given the head winds of terrorism and high oil prices. That shows the confidence of millions of workers, consumers and entrepreneurs that, despite temporary setbacks, the economy is on its usual path to future prosperity.

Looks like investors, voting with their wallets, seem to think that another Bush term is a much better prospect, economically, than a Kerry Presidency:

As Bush Goes, So Goes Market

Major Indexes Are Up in Month
That Historically Is the Weakest,
Echoing Bets on a Re-Election
September 20, 2004; Page C1

A “Bush Rally” is buoying stocks in the market’s historically weakest month, underscoring the increased attention investors are paying to politics and terrorism.

Looking past corporate profits and interest rates, some investors have begun tracking data on an Irish betting Web site, TradeSports.com, that takes wagers on, among other things, who will win the presidential election. In recent weeks, a chart of President Bush’s re-election chances based on TradeSports odds has looked surprisingly like the chart of the Dow Jones Industrial Average.

The two have been moving more or less in tandem for months, and the link seems to have kicked in most strikingly around the start of June – about the time the election battle lines began to firm up. The TradeSports data show that expectations of a Bush re-election were rising until mid-January of this year, when they topped out at about 75%. The betting then turned against Mr. Bush, and his odds fell to just less than 50% around the end of July. Then the betting swung back his way, hovering at about 70% yesterday.

The stock market has seemed to follow in Mr. Bush’s wake. The Dow industrials and Standard & Poor’s 500-stock index began their slide in mid-February, a few weeks after Mr. Bush. They pulled out of that slide in mid-August, and the Dow industrials are up 1.1% in September – a month that has had an average loss of 1.23% since their inception in 1896.

“It’s eerie,” says John Caldwell, chief investment strategist at McDonald Financial Group, a brokerage arm of Cleveland financial group KeyCorp. “It is a pretty strong relationship.”

Last week, the stock market and Mr. Bush’s odds showed little movement. The Dow industrials eased 28.61 points, or 0.3%, over the week, including a gain of 39.97 points, or 0.39%, to 10284.46 Friday, breaking its winning streak of five weeks.

The betting Web site isn’t driving the stock market, of course. And polls predicting the outcome of the presidential race are far more ambiguous.

What the interest in the Web site reflects is that investors this year have begun to attach an unusually strong importance to the election outcome. Tracking Mr. Bush’s odds is one way for them to quantify the risks involved.

TradeSports isn’t the same as a poll. It is run as a futures market, similar to one operated by the University of Iowa, in which speculators can buy or sell contracts that pay off depending on who wins. It reflects not just opinions, but the willingness of people to put money at risk, much as investors do in more-standard futures trading.

The interpretation seems obvious: When investors think Mr. Bush is going to win, stocks tend to rise. When the market sees Democratic challenger John Kerry’s chances rising, it tends to fret. Even on Wall Street, it would seem, “all politics is local.” Mr. Kerry wants to raise taxes on people who make more than $200,000 a year – including their dividends and capital gains – and many of those people control Wall Street.

Investors “like Bush because he would encourage risk-taking and capital creation through lower dividend and capital-gains rates,” Mr. Caldwell of McDonald Financial says.

Yet, historically, stocks have done better under Democratic presidents – something experienced investors also know. So the relationship may not be as simple as it seems. For example, though stocks have done better under Democrats over the long term, they have tended to prefer incumbents just before elections. Part of the reason is that Wall Street doesn’t like uncertainty or disruption.

An even simpler explanation is that Wall Street and the election are responding to the same outside factors: the rising and falling hopes for the economy and the world situation. Both Wall Street and political incumbents simply tend to do better when the economy and the world situation are strong. Mr. Bush and the stock market tend to benefit if there is confidence in the economy and in the government’s ability to deal with international threats. If there is economic or political trouble, Mr. Bush and the stock market suffer. Mr. Bush’s outlook is weakest – and Mr. Kerry’s is strongest – when the world is uncertain, which also happens to be when people are nervous about stocks.

It turns out that Mr. Bush’s standing at TradeSports correlates even more closely with the price of oil than with the stock market, says Howard Simons of Chicago-based Bianco Research, which has been following the link between stocks and Bush futures.

“If people tend to vote their pocketbook, it shouldn’t really be all that surprising that this relationship would exist,” he says. When oil prices are rising, so are economic worries. At such points, stocks tend to fall, and so does confidence in Mr. Bush.

Indeed, in recent days, as the price of oil jumped amid threats to oil production from Hurricane Ivan, the stock market and Mr. Bush’s TradeSports rating both leveled off. Mr. Bush and the stock market appeared to be affected by the economic outlook.

In any case, the presidential election outcome “is TradeSports.com’s most actively traded contract,” notes a report by Mr. Simons and Gregory Blaha, also of Bianco Research. Since Jan. 6, the correlation between the TradeSports numbers and the Standard & Poor’s 500-stock index has been more than 60%, the report says, and the relationship seems to be even stronger lately.

For most investors, however, how stocks perform between now and the election is a lot less important than how they do in the months and years after that. That is likely to depend less on Washington than on the issues that normally drive stocks – profits and interest rates.

Still, it is true that stocks do well after a Republican has been in office, regardless of whether he wins or loses. In the year after an incumbent Republican president is re-elected, the Dow industrials have risen 11% on average since 1899, according to Ned Davis Research in Venice, Fla. And in the year after an incumbent Republican president is defeated, the average gain has been even better, 14%.

Some investors are hoping for gridlock, with a president from one party and Congress controlled by the other. Since 1901, stocks have done best with a Democratic president and a Republican Congress, rising nearly 10% a year, twice the overall average.

There are limits to this kind of analysis. According to Ned Davis Research, only three Democratic presidents in the past 100 years have operated with Republican-controlled Congresses: Woodrow Wilson, Harry Truman and Bill Clinton. It is hard to conclude anything from three cases.

Some analysts caution that, in the longer run, business and economic fundamentals are more important than politics.

Says Eric Bjorgen, senior analyst at Leuthold Weeden Research in Minneapolis: “Who is in office always is going to play a secondary role to what policies and market cycles are already in place.”
[non-relevant section omitted from end of article]

BB- Very informative posts, Thank You.

While I can’t begin to argue the numbers themselves, I do question what actually caused them. Every high school econ textbook says in the early chapters that to grow an economy you increase spending or cut taxes. While this is true at heart, it can be a gross oversimplification of a complex issue, yet George Bush is still clinging to his position that his tax cut cureth all ills.

(For a great read on this, take a look at Paul O’Neils book The Price of Loyalty about the Bush administration; he was fired for speaking out against the Bush tax cut and has some fascinating insight into the inner working of this administration, but I’ll not put all that here…)

So while the tax cut may be partially responsible for our current growth, I would argue that the real impetus behind it is the Fed’s aggresive attack against this recession by controlling interest rates. With the greater availability of capital added to the devaluation of our currency, America has become a prime target for investment. The numbers look good and trade and international investment are booming.

So given these factors it’s no wonder that we’re seeing some economic recovery, but there is a darker side to them that those in the administration won’t speak of lest they suffer Paul o’Neil’s fate. The short term gains proffered by these actions must be intelligently parlayed into lasting economic growth. With the fed itching to raise the interest rates soon and start dealing with the inflation we’re seeing, policies must be set forth that keep the availability of capital high while subsequently raising the value of the dollar. Kerry purports to do this with targetted tax cuts, namely a 5% corporate tax cut followed by credits for health coverage, etc. It’s not so much protectionist as it is economically sound.

The economy, despite the numbers, is still on shaky ground, barely pulled out of a nosedive by Alan Greenspan. We must act now to stifle deficit spending and pursue sound economic policies. Sadly, Bush’s economic plan on his site begins thus:
[begin excerpt]
(copied off Georgebush.com/agenda)
? Reforming America?s High Schools: President Bush will provide $250 million annually to extend state assessment of student reading and math skills.
? Jobs for the 21st Century Initiative: President Bush will provide $500 million for Jobs for the 21st Century, which will help educate and train high-skilled American workers in schools and community colleges.
? Tax Reform: President Bush will work to make the tax code simpler for taxpayers, encourage saving and investment, and improve the economy?s ability to create jobs and raise wages.
? Opportunity Zones: President Bush will create new Opportunity Zones, which will encourage public and private investment and provide priority consideration for Federal benefits to communities that are under economic hardship.
[end excerpt]

Is Bush even talking about the same economy here? Click on the “read more” link and you’ll see more spending followed by more spending. I guess his econ education never got into the problems caused by such large debt/deficits or else he’d be acting more intelligently, more like a conservative. I agree that tax cuts are good and still needed, but they need to be shifted from the upper income brackets to corporations and business to keep the available capital in the right places, not to mention encourage a slightly more protectionist policy. How strange that such sound fiscal ideas are being touted by a democrat! I never thought I’d see the day…


I have noticed the ABB crowd has pretty much avoided the economy. They prefer to attack President Bush on Iraq. As that situation improves I expect a strong shift in their attack over to the way he dresses, or perhaps his hair style.


It’s definitely true that Greenspan has a lot to do with the economic strength at the moment – he has done a superb job of balancing the inflation threat with the idea that we didn’t want to strangle growth.

I think the deficit, as it is generally reported, is completely irrelevant. Not that I’m endorsing Bush’s spending – a lot of conservatives have problems with his spending. However, a lot also believe that Kerry’s plans will be worse.

But that’s not even the real issue. The real issue is the stuff that doesn’t even show up on the budget – namely, the shortfalls in social security, and, even more importantly, medicare, that are going to rear their heads in the next decade if they are not addressed. I don’t expect either candidate to give more than a passing mention to them, due to the nature of politics (neither wants to give the other ammunition to use against him, because the actual fixes will require sacrifices) – but, hopefully, Bush – or Kerry should he be elected, will look to deal with fixing the problem after the election.

Also problematic are the current account deficits – not the budget deficits. We’re again running a huge import/export deficit, primarily with the Asian countries, and it will likely require a huge dollar devaluation, as was the case in the mid 80s, to fix it. If they don’t fix it, the U.S. will no longer be attractive to foreign capital, and that cannot be allowed to happen. We need to be a solid investment – to attract foreign capital, and because the discipline required is good for our economy.


Good stuff.

I’d add:

  1. Labor moving across borders is a free trade phenomenon. If the Democrats truly wanted to attack the loss of jobs issue, they’d have to pillory their patron saint Clinton, who was an unabashed free trader. This they won’t do. The labor movements, in particular manufacturing, did not manifest overnight - they are the results of business decisions made over the better part of a decade as markets open and education becomes available.

  2. Economic awareness lags economic performance. The Democrats could get traction a year ago. Not so much now.

  3. The Democrats offer no plausible alternative, even if the economy was in the can. The limits of monetary policy (lowest interest rates ever) and fiscal policy (tax cuts and deficit spending both flooding the economy with money) were reached.

In short, from a policy standpoint, what other tool is available? What is the alternative?

The economy will make for a good topic at the debates.

But don’t forget that all this policy talk isn’t important - John Edwards is a pretty, pretty man.

Some good stuff from Larry Kudlow on the economy, which will certainly be a topic in tonight’s debate:

Wall Street Journal Op-Ed

It’s the Economy, Smarty Pants

October 13, 2004; Page A16

You’d think that a high-performance economy, producing above-average growth and below-average inflation, would be a re-election ace. After all, during the 10 recovery quarters since the end of the 2001 recession, real GDP – the most comprehensive measure of the economy – has averaged 3.4% growth, in line with the average post-World War II expansion rate. Since the supply-side tax cuts were passed in Spring 2003, real economic growth has jumped to 4.8%, putting it at the head of the class of the past 20 years.

Somehow – blame it on many media outlets – this message is muted. Yet over the past year:
? Inflation-adjusted consumer spending is up 3.6%.

? Residential housing investment is up 13.2%.

? Capital-goods investment by businesses is up 13.9%.

? Spending on machine tools for heavy-industry manufacturing is up a whopping 54.2%.

? Exports and imports are up nearly 11%.

? After-tax corporate profits are up 19.5%.

? Industrial production is up 5.2%.

? High-tech production is up 23.7%.

? Productivity has reached an astonishing 4.6% rate.

? Household wealth is up 11.1%, hitting a record high of $45.9 trillion.

? The GDP deflator is up only 2.2%.

? The core consumer-spending deflator (excluding food and energy) is up only 1.4%.

? Interest rates are at 45-year lows, with short-term rates at less than 2%.

? 15-year mortgage rates are just above 5%.

? Home ownership stands at a record 69.2%.

Impressive? No, remarkable, considering the economy was up against an inherited recession, a busted tech bubble, corporate scandals, 9/11, two wars and an oil-price shock. The strong performance also sharply contrasts with ongoing weakness in Europe. John Kerry may love Europe, but GDP there is growing at less than 2%, with unemployment between 9% and 10%.

Despite all this, the Kerry campaign has managed to define the economy in terms of a relatively weak set of jobs numbers taken from the non-farm payroll survey of established businesses. Team Kerry has flogged George W. Bush with the fact that payrolls have fallen (by 585,000) since the beginning of the president’s term. Kerryites talk of a “Hoover” economy, even though two million payroll jobs have been recovered in the past 13 months.

In his own defense, Mr. Bush should highlight the household survey (the number of people actually working), which shows that 1.69 million more are employed today than when he took office. An additional 3.4 million have gone to work since the end of the recession, with 140 million Americans currently employed – a new record. With all these new job entrants, the unemployment rate has dropped to 5.4%. This is no Hoover economy. But to make this point, Mr. Bush must use numbers on GDP and household employment. He must also stress personal income – the best gauge of family spending power – which is growing at a 5% pace. And he cannot be bashful about defending his tax cuts.

Mr. Kerry has already agreed with Mr. Bush on middle-class tax cuts. But when the senator from Massachusetts launches his class-warfare attack on tax cuts for the rich, Mr. Bush should inform debate watchers that taxpayers in the top 1% earn only 14.8% of the nation’s income but pay 34.4% of individual income taxes. Similarly, taxpayers in the top 5% – the biggest income losers during the downturn – make a quarter of the income but pay over half the income taxes. Why not share tax relief with those who pay the most taxes?

Punishing successful earners and investors, as Mr. Kerry would do, is no way to grow an economy. Tax hikes on dividends and capital gains are nothing but tax hikes on the whole stock market and the 50% of households that own shares. And what good will it do to set up tax barriers for those who wish to climb the ladder to $200,000 salaries ($146,000 for single earners)? Mr. Kerry may say he likes jobs, but he doesn’t seem to like the businesses that create them. By taxing capital investment more, business financing will shrink, as will the jobs that businesses create. (Who’s the Hoover candidate now?) Mr. Bush will find that a few well-placed facts will go a long way in tonight’s debate.

Mr. Kudlow co-hosts CNBC’s “Kudlow & Cramer.”