Monday, October 20, 2008

After the Fall: American Economics - Post-Boom, Post-Bust

I came across this article (from 1999) this weekend, by Dean Baker, written during the hey day of the first major dot.com bubble around the turn of the century (that has such a nice ring to it). It appeared in In These Times magazine, a publication that would best be described as progressive and might even have a little of the "S" word. I had printed the article out when it was first published, stuck it in a folder, and found it again in a box of clippings and stuff I was cleaning out at home. I know business cycles are structural, but Mr. Baker seems to have written the play book for the near future. The Wall Street Journal and much of the business press are not in the business of reality journalism. Oh, they report the economic news accurately, but in retrospect their whole worldview now appears to involve being cheerleaders from the sidelines as the spirit of the free market runs rampant across the land. We now seem to be about to reap a little of what we have sowed.

http://www.inthesetimes.com/issue/24/01/baker2401.html

A few excerpts:
Stock prices will plunge - it's just a question of when. Prices are determined by the psychology of investors. Their enthusiasm for stocks, no matter how irrational, may keep prices at inflated levels for six months, two years, even a decade. Economics and logic can't predict exactly when reality will catch up with this enthusiasm: They only assure that at some point it will.

Although the day of reckoning may be many years in the future, it is still worth thinking about what the post-crash world will look like. Most immediately, a large number of people will suddenly be far poorer. A 50 percent decline in the stock market will destroy more than $7 trillion worth of paper wealth. Some of the losers will be the Internet billionaires and other high flyers who richly deserve their fate. But most of the losers will be middle-income workers who were relying on the stock market to provide their retirement income.

A crash will also throw the economy into a tailspin. Currently the economy is being propelled by a stock-market-driven consumption boom. As people see the value of their stock portfolios rise, they go out and spend money. They are spending so much that the savings rate has actually turned negative in the last year, with people almost outspending their entire income. A stock crash will throw this pattern into reverse. As people watch the value of their stock portfolios shrivel, they will cut back their spending to try to rebuild their savings. This will lead to a large falloff in demand and almost certainly to a recession. A recession would likely raise the unemployment rate by at least 2 to 3 percent. Following historic patterns, this would mean an increase in the unemployment rate among African-Americans of 4 to 6 percent.

This new economic environment will require an entirely different political agenda. Millions of people will be desperate and angry. It will be important to be prepared to move forward with policies that address people's immediate needs and also set the path for an economic recovery on a more solid foundation. In the post-crash world, progressive ideas now seen as untenable suddenly will appear both reasonable and necessary."

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