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April 11, 2003
It has been a tough week for statues.
The evaporation of Saddam's government on Wednesday should have produced some relief in the financial markets, but did not. All we got from three days of falling bronze: three days of dropping Dow, and high fives for mortgages.
Last week's economic data were awful, but this week's could have been a lot worse: retail sales rose 2.1% in March, new claims for unemployment insurance fell from 443,000 to 405,000, and consumer confidence has crept up since mid-March.
The 120 chief executives in the Business Roundtable have been a better predictor of future conditions than any of the econometric models, and the executives are more pessimistic than they were only ninety days ago. Of these bosses, 27% intend to cut capital spending, versus 18% who will spend more; and only half expect sales to increase in the next six months, versus the 71% who did in December.
Money helps to clarify things: beyond certain points of argument, you either have it, or you don't.
Newspaper headline: "War Won; Bush Turns To Economic Recovery Plans." We can use all the help we can get, but nobody really knows for sure how to help this recovery along. The tax cut approach is exhausted, as too many Senate Republicans think a $400 billion-plus annual deficit makes a shaky platform for re-election.
The Fed is done, short of heroics we should hope they don't have to try. Cutting the Fed funds rate from 1.25% won't do much, and the feasibility and wisdom of the Fed's last-ditch plan to buy bonds and mortgages with printed money, driving down long-term rates, is in question, even at the Fed.
Steps to aid recovery are so elusive that even the President's critics don't have an alternate case. The left is in hysterics over the out-year shortage in funding for Social Security and Medicare, and has hauled out the old Republican canard that current deficits are an unfair burden on future generations. In reality, the entitlement solution will be a mix of modest benefit cuts, tax increases, and borrowing, just as always; and future generations will be fine if the economy grows between now and then. (If it doesn't grow, we are beyond help. So don't worry.)
In the real world, away from Washington, state and local governments must balance their budgets, and are doing so by the only means available: spending cuts and tax increases (better they than Congress: they are closer to their constituents, who force them to make better decisions). The state and local deficit slashing is so severe that it may completely offset the stimulative effect of the Federal deficit.
Economic drags are everywhere, with no locomotive; this is the 1930s with sound banks. Time, time, and more time until recovery: there is no other prescription.
Then there's Iraq. The Bushies seem to think that given a couple of years, we'll build a sort of Islamic Kansas (worst case, Oklahoma). Maybe so.
Meantime, one impediment is money. It seems that Iraq owes about $400 billion to the world, a debt-to-GDP ratio roughly ten times as bad as Argentina's. If Saddam is still alive, he is also broke; his personal loot can't cover the tab.
Half of Iraq's total burden is reparations from Gulf War I (just like the Versailles burden on Germany, which led to what's-his-name, with the other moustache) adjudicated by the UN, which seizes a quarter of Iraq's gross revenue from oil sales to pay the claims. Russia is owed about $65 billion of the total, and the largest part of the rest is construction contracts with France and Russia.
There is only one way to free oil revenue for reconstruction: the new government of Iraq must repudiate the obligations of the old. If you were nervous about the conflict with our ex-allies at and near the UN before the war, just wait for this one.
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