The Economic Debate Is Ending Precipitously

12/30/2005

It’s Raining On Our Economic Parade.

As the year 2005 ends we have a situation with the GOP claiming a bullish economy even as investors express a number of concerns including a prediction of a 50-50 chance of a recession (stock market crash?) during 2006.

How can the economy be good if we face a possible recession or a market crash? Somebody is fibbing to someone.

Investors opine that GM is almost a certainty to declare bankruptcy. They are not alone as industry after industry seeks to dump their pension and healthcare benefits leaving American workers high and dry and disadvantaged when compared to Canadian and European workers.

The middle-class, the economic backbone of America, is shrinking and even when putting the best possible face on it their income is capped even as buying power declines. The enemy is not inflation it’s devaluation of the dollar. This means that upwards mobility is also largely capped and that the American standard of living is declining. The Bush response is to shrink the value of the dollar further thus further eroding buying power but making the numbers look rosy. “Look… IBM had more earnings than last year.” “Yeah, but these are devalued dollars that they earned.” “Oh, better allow more cheap imports and make it look like the dollar is strong.”

As they say in Boston – someone is full of bologna around here (or is beans?)

Middle class baby boomers looking at looming retirement are finding that their pensions are eroding, their health benefits declining, their 401K buying power shrinking, the investment climate is depleting their retirement investments, the taxes on their too big homes are rising and the bottoming out of their real estate equity is happening. This is the largest bloc of voters in America and they are getting mad. Now add to that a determination by the GOP to take away their Social Security benefits and their Medicare and the seeds of great anger have been planted.

The GOP loves to cite a 5% employment rate as being near the full employment rate (unemployment was 4% under Clinton and 2% here in Minnesota) and Democrats point to the amount of people pushed out of the employment pool and they point out that the 5% figure does not represent true job demand, but instead represents a rolling window of layoffs over the last six months and that our economy has been in steady job loss mode for five years now with the problem worsening as jobs move off-shore. Many of these jobs are part time work that Baby Boomers were hoping to have to supplement their retirement income. Now that too is going away.

Democrats also point out that when you have a five year failure rate at creating jobs that the GOP track record is thus poor overall and that two months of creating 200,000 jobs over five years is a mighty dismal economic record especially when it takes 320,000 new jobs created per month to stop job losses. As they see it job creation is falling behind real demand at a rate of 120,000 jobs per month and is 33% shy of meeting the real needs. They don’t buy the GOP rosy picture that Bush ought to be lauded for his economic success.

When it comes to the deficit, Congress is politically vulnerable as this 2005 session ends. Also when it comes to war costs the Iraqi War is a terrible drag on the U.S. economy and there is bi-partisan agreement on this point with Conservatives vocal about it thus causing an inter-party split within the GOP and some bashful economic teaming with Democrats is starting in to be seen in Congress as a result. There is definitely backlash against the GOP Administration by GOP Fiscal Conservatives. This will get lots of attention during the 110th Congress and during 2006 as Congress works to manage wicked problems that they have created.

There is concern that the Bush Administration cannot bring home the troops because there is no work for them once they do come home. Democrats point to the new subsidy that the Bush Administration is providing troops who have returned home. They are being kept on the U.S. Army payroll in make-believe jobs rather than transferred onto the unemployment roster.

When it comes to the housing bubble there is clear evidence that the cost of acquiring a home for young married couples is rising beyond their reach. The cost of keeping a home for the elderly and the cost of maintaining a home for the middle class are both in jeopardy. With the middle class cut-off from bankruptcy and credit card rates allowed to run at 30% interest levels there is a mounting sense of terror. There is an equity bubble that all know is in trouble and that will likely burst during 2006.

The Bush Administration antidote is to hype for an increased savings rate but the middle class has little left to save at the end of the month.

Investors in real estate are concerned that rental rates are peaked, demand is in excess, and that the sale price of commercial units are falling while real estate taxes have been pushed down by the Federal government to the State and by the State onto the Local government and by them onto property owners with commercial property owners heavily hit because they have multiple units and thus the impact is multiplicative on them. Homeowners are all real estate investors too and thus much of America is alarmed at Congress and their ideological attitude to a failing economy. People wonder why Congress isn’t earning its keep and representing them and their interests much better.

Many Americans look around and they see rising taxes, falling buying power, expensive energy costs, a political thrust towards Globalism and that further hurts the employment picture and they wonder if their Congress-person will represent them or the people of India and China.

Labor is disgusted with the Bush Administration and the failure of the Labor Department to look after the needs of American workers.

Even Agriculture is watching as the World Trade Organization demands cuts to American farm subsidies while watching petro-politics play out with Brazilian ships containing Ethanol arriving in U.S. ports and being given the same subsidy as American farmers get and farmers wonder if Congress knows what it’s doing.

In the meantime the Enron case plus the DeLay and Scooter Libby cases are scheduled for trial and the work on dealing with Abrahamson and the indictments that will flow from that scandal are just beginning. The perception of Washington corruption is high and the middle class angst is rising against Washington politicians whom many see as on the take.

We need to have a real dialog concerning illegal immigration in America but the air is too fogged with partisanship to permit that to occur in any meaningful way.

No investor can be happy with the stock market. It is stuck. All attempts to raise it have fallen flat and the numbers are still hovering around the 2001 levels. An inverse yield curve is in place and that means that positive investment is a loser while selling American companies short is a way to make money. That strategy further hurts the market yield curve and is a short-cut to a market crash (oops, I mean a recession).

As the Congress is in recess the wanna-be returnees to Washington are hearing all of this and more from the hometown folks and they are beginning to grasp the depth of anger that is felt over the failed economy and the bad reactions to GOP claims that Americans have never had it so good. They GOP politicians and the public are just not on the same page at all. In the meantime Democrats have been telling it like it is and people can see for themselves that Democrats are not lying to them. The also know which Party controls the White House and the Congress. Then they look back at the Clinton years…

This does not bode well in an election year and while some in the GOP think that they have protected themselves with gerrymandering of their seats and districts they are concerned about a much bigger problem in the form of a groundswell of determination to throw the GOP out of office and to simply change horses. The present ponies have been riding the track since 1994 and the supply side economics of the GOP has yet to yield any benefits for anyone except millionaires. Some wonder if it isn’t time to declare the GOP thesis a failure and to just recognize that Capitalism has it flaws and that the best way to counter the flaws is to balance government with a mix of Democrats and Republicans, giving neither a mandate and thus forcing both parties to negotiate and solve their problems in a bi-partisan way. After all, that method worked for a good part of the 220 year history of America. Why are people trying to destroy what works? For that matter, why are they trying to destroy the U.S. Constitution? Also, what is Congress going to do with a President who refuses to obey the law and allows domestic spying on the public?

As 2005 ends the voters of America will decide the outcome in the coming year and for a Congress seeking re-election it’s getting to be a dicey proposition whether they will be sent back to Washington in November 2006 or not. After all they have angered a lot of voters. The GOP strategy of dividing America has worked just fine. We are all now all divided.

Now what?