18.10.02

SPECIALIZATION AND TRADE Professor Gutman, I wouldn't venture into literary criticism. Since you have chosen to play Economics with me, for what you are about to receive, give thanks.

"So why has the rumor of war taken over the front pages? First, there is 11 September. The American psyche was profoundly altered by the events of that day when terrorism became a reality and not just a distant threat. The need to protect the nation against eruptions of violence within its borders, has deep resonance. Yet the unhappy truth for the Bush Administration is that its onslaught against Al-Qaeda has not gone well. After an initial victory over the Taliban — a “lesson” taught that those who harbor terrorists will suffer grave consequences — the war on terrorism has had few triumphs to trumpet. Osama bin Laden has not been caught; his purported worldwide network has not been exposed."

Right. It's a bit difficult to catch pink mist. Perhaps you ought to get out among the public. Read InstaPundit or Greatest Jeneration or Little Green Footballs. You might find the Rottweiler to provide transgressive hermeneutics that you wouldn't find in Social Text.

(text slipped at Reading)

"In the past four years, the USA lost two million manufacturing jobs, 10 per cent of its manufacturing work force. One in five jobs in the care industry was lost, one in three jobs in textile manufacture. The number of people living in poverty as well as those without health insurance are up. So too are personal bankruptcies. Unemployment is rising, long-term unemployment is going up even more rapidly. A ballyhooed “economic recovery” is nowhere in sight."

Plenty of blame to go around here. Also plenty of deception. Have jobs moved out of manufacturing, not because of runaway shops or capitalist greed, but because the Census now classifies some formerly manufacturing industries as information industries, or as service industries? (Time permitting, I will post this information. Your researches are invited). The use of the term "number" is deceptive as well: as a proportion of the population, have the rates of poverty or the rates of uninsured been rising? Is that even something to worry about? Based on income, retiring members of the Silent Generation might well be classified as poor, but based on their asset holdings, they're rich. Because the large Millennial Generation is coming of working age, we would expect the proportion of what you call uninsured workers to rise, simply because insurance is a poor investment for younger workers without dependent children. Or are you pining for the days when labor force participation by young women was low?

"The most stark and stunning news appears on the financial pages, where the daily reports of stumbling stock prices are listed. Stocks, of course, are not the economy: but they are an index to both what is happening, and what is to come. Yet the newspapers these days address them merely as a daily phenomenon, not as a narrative of historical dimension. The aggregate numbers of the declining stock market are stunning. But they are either buried deep in the financial section or not reported at all."

Paul Samuelson has quipped that the stock market has called nine of the past five recessions. Or something to that effect. And to claim that this information is not reported at all is a lie. Find the archives of the Drudge Report for the days the Dow Industrials dropped by 300 points.

"By the close of the third quarter of 2002, the Dow-Jones average, America’s most widely cited measure of the valuation of its major corporations, had dropped 32.7 per cent since its high on 11 April 2000. Thus, it lost almost one-third of its value. In the great stock market crash of 1929, The Dow Industrial index fell 48 per cent over two months, but thereafter it rallied for the next for five months. So although the fall in stock prices of the nation’s largest corporations is not as precipitous as it was then, it is nonetheless steep, even by historical proportions."

Similarly, the unemployment rate in August is one that Jimmy Carter would have forfeited all claims to the Nobel Peace Prize for, could he have arranged it in September of 1980. And stocks trade, historically, at fifteen times permanent earnings. It pays to think through what Alan Greenspan meant, back in 1996, when he made that "irrational exuberance" speech.

"The Standard and Poor 500 index, a broader measure, has done even worse. It has fallen 46.4 per cent since 24 March 2000. Since the S&P index has been in existence since 1923, it can provide a reasonable comparative measure of historical trends. The 46 per cent decline is only 1½ per cent away from the biggest dip registered since the depth of the Great Depression, in 1937-39 and already the longest-lasting one since the bear (declining) market of 1938-1942."

See above.

"The numbers get even worse if we look at the Nasdaq, the market on which most emerging stocks are listed. On 10 March 2000 it was at 5048; at the end of the third quarter of 2002 it stood at 1182. That is a drop, from peak to current trough, of 76.8 per cent. Compare that with the drop between 29 October 1929 (“Black Thursday”) and the bottom of the Depression market, on 8 July 1932, a period when the market declined 89 per cent. Seventy-seven per cent is not far from 89 per cent — and the Nasdaq is still plunging."

Yes, and during 1999 and 2000, those NASDAQ stocks that had earnings traded at 300 to 1000 times earnings. I didn't buy any of those stocks. Did you?

"One could try to minimize this staggering loss by suggesting that the Nasdaq is a more speculative market than the New York Stock Exchange. But in the past decade, many of the nation’s fastest growing and most successful companies were listed there. Four of the top 10 corporations in market capitalization— Microsoft, Cisco Systems, Intel and Oracle — were on the Nasdaq. In simple terms, a great deal of the money invested in US corporations was in Nasdaq-listed stock, which lost over three-quarters of its value in the past two-plus years."

Yes, and we're still having a conversation about whether or not the antitrust difficulties Microsoft and Intel encountered made any sense, as economics or as policy. Those difficulties will affect the expectations of future earnings, whether valued at fifteen or fifteen-hundred times those earnings.

(slip ...)

"What does the huge decline in stock prices mean for America’s ability to fund the proposed war in Iraq and its consequent occupation? Senator Ted Kennedy recently estimated the war would cost $100-200 billion. But when the stock market plunges, so do tax revenues. According to figures compiled by the US Congress, capital gains taxes amounted to $129 billion in fiscal 2001. Rising stocks lead to profit taking; when investors take a profit, they pay taxes on it. Falling stock prices mean that the taxes formerly realized from capital gains taxes are no longer available."

Absolutely nothing. President Franklin Roosevelt was able to finance victory in World War II, despite a bearish stock market. Buy War Bonds. At least you're not suggesting that there will be war profiteers to pay the capital gains tax. Progress among "progressives." I like that.

"A fiscally hard-pressed government — and the USA’s surplus of $127 billion in 2001 is already predicted to be a deficit of $157 billion by the end of 2002 — will not be able to fund both a war and social services. So social services will be slashed."

Perhaps. On the other hand, perhaps we will have a serious conversation about what those social services are. Does it make sense to provide subsidies to the middle-class and the rich in the form of low tuitions at state universities? Does it make sense to provide subsidized water to rice farmers in the desert, and to raise the price of corn and of sugar, by excluding African agricultural products from our markets? Does it make sense to subsidize the use of automobiles, by providing matching funds for local road construction?

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