MoveOn Bulletin (US edition)
Wednesday, December 4, 2002
Editor: Susan Thompson
susan.thompson@moveon.org
Editorial Assistant: Leah Appet
leah@moveon.org

Subscribe online at:
http://www.moveon.org/moveonbulletin/

Contents:

1. Introduction: "Double-Dip" Recession or "Soft Patch"?
2. One Link: The Roaring Nineties
3. The Economy Now and in 2003
4. State Economies
5. Unemployment
6. Some Recent Good News
7. The Military Budget and the Threat of War
8. Tax Cuts
9. Book Recommendation
10. Call for Submissions
11. Credits
12. About the MoveOn Bulletin and MoveOn.org

 
INTRODUCTION: "DOUBLE-DIP RECESSION" OR "SOFT PATCH"?
The US endured a recession in 2001, but this year it seemed that the economy was slowly and steadily recovering from it. Unfortunately, this economic rebound has lost much of its momentum, and some economists and businesspeople fear that the US could slide into a "double-dip" recession, or one recession closely following another. Alan Greenspan has testified before Congress that the current downturn in the economy is only a "soft patch" that will be corrected by such actions as the cut in the Federal Reserve's main interest rate. However, it remains uncertain how much this cut will help.

There has been some recent good news. Productivity remains high, and is actually exceeding growth estimates. Americans are still buying and refinancing homes due to record-low interest rates. The stock market has appeared to recover in the past few weeks, and consumer confidence has also risen after falling to a nine-year low. These recent events have helped quell fears that a new recession is coming.

Still, there are many factors that are tempering feelings of optimism. It is uncertain how long high productivity rates and the strong numbers in housing will last. Unemployment rates are remaining stubbornly high. The states face a combined $60 billion deficit in 2003, which they will have to deal with through layoffs, tax increases, and decreased spending on everything from building roads to healthcare and education.

Then there is the threat of war with Iraq. Of all the factors that will determine the economic outlook for 2003, this is one of the most important and unpredictable. Analysts and government officials offer conflicting predictions about whether the war will help or harm the economy. The fear of an interruption in oil supply has already pushed oil prices high, and even though a US-controlled Iraq would ensure greater access to oil, an actual attack on Iraq may just force oil prices higher. The threat of war has also been blamed by some for the poor performance of the stock market, while the recent market rally has been attributed to the possibility of a diplomatic solution as a result of the return of weapons inspectors to Iraq. If an attack does happen, the new instability could once again send the stock market plunging. It's also difficult to predict how long war on Iraq would last. A short war on Iraq, which is what the Bush administration is predicting, would have a much different impact than a protracted one. If the war is not won quickly, and costs continue to rise, it may be difficult for the US economy to cope. An extended occupation could also put an unreasonable amount of strain on the nation's monetary resources.

So, while economic gurus continue to repeat the mantra that the US economy is recovering, there are probably too many variables at play to make a call one way or the other--yet. That may be cold comfort for all of the people who have recently lost their jobs and are facing cuts to essential infrastructure and services. One thing is certain--the state of the economy has become too important to ignore, even with the intense focus on Iraq.

 
ONE LINK: THE ROARING NINETIES
Joseph Stiglitz was chairman of President Clinton's Council of Economic Advisors, and later, chief economist of the World Bank. After he began to question the globalization policies of the World Bank, Stiglitz was fired, but went on to win the Nobel Prize in Economics in 2001. In his "revised history" of the nineties, Stiglitz examines the economic forces at play in the world and how they have led to the current situation in the US. He critiques globalization as it has been managed so far, and contends that many of the widely accepted accounts of why the economy did what it did in the nineties are simply not true. His main point throughout is that better economic policies on the part of the US could minimize or prevent many problems, including the negative perceptions of the US prevalent throughout much of the world.

"In explaining our success in the nineties to ourselves and the world we have largely drawn on a set of myths that desperately need debunking: that deficit reduction by itself led to the economic recovery of the 1990s; that the brilliance of our economic leaders created our newfound prosperity; that deregulation and self-regulated markets are the key to sustaining that prosperity, and should thus be exported to the rest of the world; and that American-style globalization is based on high-minded principles of equality and social justice and will inevitably lead to global prosperity, benefiting not only financial markets in America but also the poor in the developing world."
http://www.theatlantic.com/issues/2002/10/stiglitz.htm

 
THE ECONOMY NOW AND IN 2003
Is the recession of 2001 over? The National Bureau of Economic Research (NBER), the official US body which is "the generally acknowledged arbiter of the business cycle," has yet to declare that it is. The reason may be low employment figures, since employment is generally the main variable used to determine the state of the economy. However, industrial production, wholesale retail sales and personal income have all been doing better; the author of this article argues that this should be enough to indicate that, yes, the recession is over.
http://www.economy.com/home/article.asp?aid=1967

The most common current fear about the US economy is that it will slip into another recession. If it did, since it would follow so closely after the 2001 recession, it would be called a "double-dip recession." This article provides a very clear overview of why the Federal Reserve, America's central bank, was originally so confident that the economy was recovering from the 2001 recession, and why that confidence has begun to erode. The author also explains that the US may now be caught in a "liquidity trap," or "a situation in which the short-term nominal interest rates the central bank controls are so low and so loosely connected to the level of aggregate demand that further reductions in interest rates are not effective ways of fighting recession"--in other words, a situation in which the government is unable to create policies that will prevent the economic situation from getting worse.
http://www.j-bradford-delong.net/movable_type/archives/000770.html

The Monetary Policy Report was released on July 16. In his testimony to Congress on the report, Alan Greenspan asserted that "while the economy has held up remarkably well," the US is still facing "[c]onsiderable uncertainties."
http://www.federalreserve.gov/boarddocs/hh/2002/july/testimony.htm
For the full text of the July 16, 2002 Monetary Policy Report to the Congress see:
http://www.federalreserve.gov/boarddocs/hh/2002/july/FullReport.htm

Greenspan's testimony to Congress on November 13 still focuses on the resilience of the US economy. However, this time around, Greenspan admits that "the lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks" have all "taken their toll on activity." Among the many variables he examines are consumer spending, tax cuts, mortgage markets, and productivity. Greenspan concludes that the US economy has hit a "soft patch," while remaining optimistic that the measures being taken will help counteract it.
http://www.federalreserve.gov/boarddocs/testimony/2002/20021113/default.htm

The November 27 edition of the Federal Reserve's Beige Book summarizes current economic conditions.
http://www.federalreserve.gov/fomc/beigebook/2002/20021127/default.htm

The White House provides a chart which lists recent economic statistics in a very easy-to-understand manner (posted Nov. 7).
http://www.whitehouse.gov/fsbr/employment.html

Several surveys and studies indicate that members of the business community are predicting a poor economy for 2003.

• According to a survey by American Express, more than two-thirds of middle-market chief financial officers (CFOs) believe that in 2003, the economy "will either will stay flat, act erratically, or decline further." In order to deal with the "cautious to negative" economic outlook for 2003, the CFOs are largely going to rely on cutting costs.
• The Business Roundtable surveyed CEOs and found that most CEOs "expect weak gross domestic product (GDP) growth, declining employment, and flat capital spending in 2003."
• The Organization for Economic Cooperation and Development (OECD) recently predicted that the US economy would not pick up until 2004.

Since the Republicans now control both House and Senate, it is almost certain that a number of Republican economic projects based on tax cuts and continued spending will now pass. This "virtually guarantees a return to the era of structural budget deficits," and eliminates any hope for a balanced budget, according to this commentator.
http://slate.msn.com/?id=2073577

In a report characterized as "gloomy" by the Guardian, the International Monetary Fund (IMF) has scaled back its predictions about world economic growth and is predicting only a very slight increase over last year's growth, which was the lowest in a decade. IMF experts caution that if oil prices continue to rise, even their new predictions may prove overly optimistic.
http://www.guardian.co.uk/recession/story/0,7369,798949,00.html

 
STATE ECONOMIES
New York City and State currently face a combined $15 billion deficit, and most of the other states face a similar problem (the exceptions are Hawaii and Idaho). According to Chris Hoene, research manager at the National League of Cities, "For the first time in 10 years, you have to talk about cities facing a genuine recessionary economy." As a result, after hardly mentioning the topic in recent elections, officials are now being forced to find solutions to their deficit problems, including unpopular new policies like cuts, layoffs, and tax increases. Harvey Robins, a top-ranking aide to two former New York City mayors, recently stated, "If we continued to cut taxes, we might as well turn off the lights in American cities."
http://www.washingtonpost.com/wp-dyn/articles/A31210-2002Nov23.html

State revenues dropped by 6 percent last year, the first collective decrease since World War II. In 2003, large budget shortfalls are being predicted; and while there is no total estimate as yet, the current prediction is a collective shortfall of $40 billion. In an effort to respond to this problem, the states have instituted the largest tax increases in a decade. Yet costs, such as healthcare, are continuing to outgrow tax revenue.
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20021126/ap_on_re_us/states_money_woes_4

The most recent figures are now projecting that the states face a combined budget shortfall of $60 billion in 2003. This is especially bad news since most of the states have already exhausted their available financial resources, including rainy day funds, tobacco settlement money, and borrowed money, and will thus have to rely on cuts to infrastructure and tax increases to make up for the shortfall. The main problem is that state tax revenues have dropped severely. Nor are they expected to grow in 2003. At best, if the US economy manages to avoid sliding into a double-dip recession, if consumers continue to spend, if stock prices don't drop again, if war with Iraq is avoided or concluded quickly, and if no new terrorist attacks occur on US soil, then tax revenues will remain the same in the 2003 fiscal year with some possible growth in 2004/2005. But the outlook is much gloomier if one or more of these variables don't fulfill current hopes.
http://www.economy.com/home/article.asp?aid=1983

 
UNEMPLOYMENT
Unemployment rates reported by the Bureau of Labor Statistics have stayed almost the same, rising only a tiny percentage, from 5.6% in September to 5.7% in October.
http://www.bls.gov/news.release/empsit.nr0.htm

Unemployment rates are also likely to remain high in 2003. There were more layoffs in October than in any other month this year except January. The states are also facing budget deficits (for more on this see the next section on state economies), and are likely to lay more people off in order to cut costs.
http://www.workingforamerica.org/econupdateNov.htm

The Washington Post reports that "nearly 1 million jobless workers will almost certainly lose their federal unemployment benefits during the Christmas season." This article provides the basic facts about unemploment benefits and why they will be discontinued (since this article was published, the deadline to extend unemployment benefits to some workers did in fact pass without action.)
http://www.washingtonpost.com/wp-dyn/articles/A23624-2002Nov21.html

 
SOME RECENT GOOD NEWS
Investors have been cheered by the fact that consumer spending and durable goods orders both rose in October. Weekly jobless claims also fell to their lowest in 21 months. Meanwhile, the Dow Jones Industrial Index has appeared to be on the road to its eighth straight week of gains, as it "scored its fattest gain on the day before Thanksgiving ever."
http://www.washingtonpost.com/wp-dyn/articles/A47531-2002Nov27.html

Consumer confidence, which had been sliding lower and lower for the past five months, rebounded in November. It now stands at 84.1, up from a nine-year low of 79.6 in October.
http://www.crc-conquest.org/consumer_confidence/

Productivity has remained high, which has been "keeping a lid on inflation," according to the New York Times. The US Department of Labor recently reported that productivity grew at a rate of 5.1% in the third quarter of this year, which is higher than the 4% growth rate that experts predicted. "The reports show that the economy by no means will go into a double dip recession," according to economist Clifford Waldman of Waldman Associates. (Note: You may need to complete the free registration on the New York Times site to access this article).
http://www.nytimes.com/aponline/business/AP-Economy.html

This is an excellent short introduction to productivity, which explains what productivity refers to in the context of economics, how it is related to standard of living, and why there has been a recent surge in productivity.
http://www.dallasfed.org/eyi/usecon/0003growth.html

Housing has also been considered a "bright spot" in the economy, with loan applications for the purchase of homes increasing over the summer. According to this very short article, "Without a doubt, the housing market is very strong and is helping to push the U.S. economy toward recovery. Consumers and mortgage markets are receiving a boost as the bond market benefits from the present investor uncertainty in the stock market."
http://www.rismedia.com/index.php/article/articleview/1566/1/276/

Unfortunately, experts are worried that housing "bubbles" in major cities of the US could pop, especially if the economy slows any further. If these housing bubbles do pop, it could have an extremely negative impact.
http://www.stuff.co.nz/stuff/0,2106,2098468a6026,00.html

 
THE MILITARY BUDGET AND WAR
Most of the states may be facing a deficit, but President Bush still got a $396 billion defense (military) budget for 2003. That's more than the combined military budgets of Russia, China, Iraq, Iran, North Korea, Libya, Cuba, Sudan and Syria.
http://www.thenation.com/failsafe/index.mhtml?bid=2&pid=163

The threat of war is arguably one of the most important variables in determining what the US and world economies will be like in 2003. Many economists have blamed the US push for war on Iraq for the slow recovery of the economy after the 2001 recession. Fears of an interruption in the supply of oil due to an attack on Iraq have driven oil prices up.

Yet US stock markets have appeared to rally in the last few weeks. Some economists regard this as a result of the possibility of a diplomatic solution to the problem of Iraq now that weapons inspectors are in the country. "The stock market was relieved that we might not go to war," stated William Quan, chief economist of Wall Street's Mizuho Securities USA.

And if US does go to war with Iraq? This improvement could falter, especially due to the high price tag on such an effort and the occupation that may follow. Peace, on the other hand, could benefit the economy by keeping oil prices stable and keeping the federal budget deficit (and therefore interest rates) down.
http://www.csmonitor.com/2002/1125/p03s01-usec.html

This is an excellent article about the effect that a war on Iraq would have on the economy, as much for the realistic predictions it makes as for its clear, cogent, and compelling summary of the contradictory arguments being used to push for war.

Analyst Alan Reynolds points out the obvious yet often overlooked fact that "...assurances that Iraq is a feeble military power contradict the rationale for war — namely, the assertion that Iraq is in possession of terrifying weapons. Iraq may be a dangerous predator or an easy prey, but it cannot be both."

As a result, he predicts that the Iraq war is going to be a costly one, and longer than we're being told: "My best guess is that war and its aftermath would be more costly and difficult than the optimists admit. The fact presidential adviser Larry Lindsey publicly estimates it would cost $100 billion to $200 billion implies the administration expects a second Iraq war to be 2 or 3 times more difficult than the first one."

As far as oil prices are concerned, Reynolds notes that the situation is much different now than during the first Gulf War. "Unlike 1990, oil is already fairly pricey today because (1) substantial risk of war has already been priced into the oil markets, and (2) the post-1991 'sanctions' have reduced world oil supplies while making the Iraqis more dependent on Saddam. In 1991, oil prices fell and stocks rallied when the United States attacked Iraq. But that was because pushing Iraq out of Kuwait reduced risks to world oil supplies. An attack on Iraq today would have the opposite effect."

Reynolds also notes that by focusing energy on Iraq, the US must move its attention away from Al Qaeda, thus leaving an opening for another domestic terrorist attack which could have negative effects on the economy. http://www.dailytimes.com.pk/default.asp?page=story_26-11-2002_pg4_8

Senior officials in the Bush administration are still touting war with Iraq as a solution to recent economic woes, though. Undersecretary Grant Aldonas, a senior U.S. Commerce Department official, recently stated that a war on Iraq would be good for the economy. "The combined effect may actually be positive economically because it would eliminate one of the real sources of terror and one of the real clouds hanging over the world's economy," he said. "At the same time it will open up the spigot on Iraqi oil, which would certainly have a profound effect in terms of the performance of the world economy for those countries that are manufacturers and oil consumers." Aldonas was quick to add that this was not the main reason for attacking Iraq.
http://asia.news.yahoo.com/021003/reuters/asia-128017.html

 
TAX CUTS
The underlying assumption of President Bush's economic policies seems to be that tax cuts are a good way to stimulate the economy. In this op-ed, two experts in economics argue that government spending is a much better economic stimulus than tax cuts.
http://www.brookings.org/views/op-ed/orszag/20011130.htm

President Bush has been pushing for a vote that would make last year's tax cut, set to expire in 2010, permanent. According to the President, making the tax cut permanent will help the economy. However, Federal Reserve Chairman Alan Greenspan recently advised against a vote to make last year's tax cut permanent, saying, "I know there's a presumption that if you make those tax cuts permanent it will add stimulus to the economy. I doubt it." However, while Greenspan has expressed praise for "sunset" clauses and provisions that force periodic reassessment of tax cuts and other legislation, he has not recommended that tax cuts already enacted by the Bush administration be frozen or rolled back.
http://www.washingtonpost.com/wp-dyn/articles/A51334-2002Nov13.html

How should Democrats respond to the fiscal crisis facing the States? Should they advocate freezing the tax cuts? President Clinton's chief economic advisor says yes.
http://www.washingtonpost.com/wp-dyn/articles/A55637-2002Nov29.html

Some conservatives are now worried that low-income families aren't paying enough taxes. Why is this a problem? Because it doesn't make them angry enough at the government to support tax cuts.
http://www.washingtonpost.com/wp-dyn/articles/A39211-2002Nov25.html

 
BOOK RECOMMENDATION
One of our dedicated research volunteers, Lita Epstein, has coauthored a book called The Complete Idiot's Guide to the Federal Reserve. It is due to be published in January.

For more information:
http://www.amazon.com/exec/obidos/ASIN/0028643232/qid%3D1037878097/sr%3D2-2/ref%3Dsr%5F2%5F2/104-3131781-6768765#product-details

 
CALL FOR SUBMISSIONS
If you are involved in peace or social justice efforts, we would like to hear from you. Just write a short essay of 500 words or less about your experiences, and what gives you hope. Please submit your essay to Susan Thompson, MoveOn Bulletin Editor, at susan.thompson@moveon.org, by December 15th. The best essays will be published in an inspirational bulletin on hope, which will come out on December 18th.

 
CREDITS
Research team:
Susan Bunyan, Lita Epstein, Terry Hackett, Sharon Hametz, Matthew Jones, Linda Langness, Cameron McLaughlin, Janelle Miau, Vicki Nikolaidis, Sarah Jane Parady, Kim Plofker, Jesse Rhodes, Ora Szekely, Bland Whitley, and Mary Williams.

Proofreading team:
Madlyn Bynum, Eileen Gillan, Mary Anne Henry, Kendra Lanning, Mercedes Newman, Dawn Phelps, Rebecca M. Sulock and Rita Weinstein.

 
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