It really is saying something if Brad DeLong is optimistic. He doesn’t really know if he should be happy or horrified. Not only does this make DeLong’s hero Paul Krugman look like a fool---but it almost certainly dooms the Democrats’ election chances. My own theory is that the majority of Americans are safely ensconced in their jobs and earn a solid income. Their earlier fears no longer seem justified.

I still predict that Brad DeLong, James Fallows, and the other so-called New Democrats will have a rough choice to make in November of next year. The next Democrat presidential nominee will be far to the left of Bill Clinton. Also, Al Sharpton will run as an independent claiming that the Democrats mistreat the Afro-American voter. Are there any hidden pictures of Bush beating up an old lady? If not, he will probably be reelected by at least a 6 point margin.

That's possible, but let's wait a while before planning our election night parties. In the first place job growth has to happen; precedent suggests that it will, but there are reasons to doubt this now. As far as government spending contributing to economic growth, it is a little misleading to identify its contribution with its rate of growth in the quarter only.

I'd be booming these numbers if the election were next month, but it isn't, and lots of things can go wrong in the next year.

“In the first place job growth has to happen.”

The liberal media will of course continue raising the bar. How low does the unemployment figures have to go? Is there a point where the bickering ceases? Do you truly think this would be an issue if Al Gore resided in the White House? If you answer in the affirmative---then I have a bridge in Brooklyn to sell you.

Should Republicans uncork the champagne bottles? Well, let’s put it this way---the Democrats would gladly trade places. Terry McAuliffe is desperately searching for a photo of President Bush mugging an old lady.

The American people, by no later than the middle of next year, will also be proud of our actions in Iraq. The folks currently complaining are likely to pretend that they were always for that nation’s liberation from tyranny.

Thompson,

What we got here is a problem interpreting long term structural reform effects with mid term stimulatory initiatives and short term economic performance. No President has the ability to significantly effect short term economic performance. If the U.S. were to pull out of the recession into an expansion in late '04 or early '05, then that would be about par for the course. Remember early '90s or '80's?

In the mid-term Presidents can by encouraging economic stimulation gradually boost the *future* short term economic performance of the country. Here tax cuts, deficit spending, lowering the dollar value on exchange rates, and leaning on the Fed to lower interest rates all have juiced the economy.

The "Great Unraveling" however should be applied principally to the long term economic structure of the United States. By failing to reform corporate accounting, we risk another bubble - the WSJ of all places thinks some of the corporate numbers are funny. By failing to cooperatively manage international trade policy regarding subsidies, tariffs, duties, etc. the President risks trade-wars and economic imbalances that damage all economies. By artificially lowering the Capital Gains tax, the President discourages entrepeneurship and gives incentive toward Financial speculation and low ROI fixed income capital investment - dividend paying stocks and bonds/T-bills. By passing poorly constructed educational legislature, the President fails to reform and actually damages the investment in human potential that we will need to prosper in the 21st Century. By wasting international political capital and goodwill by foolishly conducted foreign adventurism, the President squanders the freedom to lean on unfair economic actors such as China or Russia since he needs their assent or at least acquiesence to pursue unpopular foreign programs. In failing to reign in spending, also partly because of poorly conducted foreign wars, President Bush risks diverting capital into low ROI loans to the US government to finance the Deficit rather than high yeilding but risky venture capitalism or entrepeneurship. By failing to articulate an adequate policy for dealing with near future Social Security liabilities, President is risking a marked decline in the standard of living of our elders, or a financial implosion of austerity and debt.

In other words, Paul Krugman is correct in that there is a Great Unraveling going on. He was just wrong to connect it to short term economic performance, a mistake he made in over-zealousness. The United States is becoming a poorer, meaner place on account of President Bush. The difference is that it will take 10 or so years to see the full effect of this, long after this particular minor recession is gone. In the future, Americans may look back on this recession and sigh about the good old times.

Oh and Thomson,

About that comment that by next year Americans will become proud of our actions in Iraq, that is a possibility - but if and only if a radical change of course takes place.

Stuff like how Powell begged the aid agencies and UN to stay despite bombings or else "the terroists will win.", and how right on cue the very next day the IRC, Doctors w/o Borders, and the UN started pulling out the last of its expat staff isn't going to build that confidence however. Neither is President Bush's order at a NSC meeting to do a rush job on putting more Iraqi forces on the street even if it means skimping on their training. You cannot win wars on the cheap, with a penny-wise and pound-foolish attitude.

Here the bankruptcy of George W. Bush's policies become clear. He refuses to take the steps advocated by his own side necessary to win, because of short-sighted political considerations. On the other hand, he attempts to "get by" with foolish policies that only worsen the situation.

There is no reason why in the world why we should lose this war, except for one - GW Bush and his aides are doing the wrong thing at the right time every step along the way. And so as of now, your optimistic forecast of American pride in Iraqi progres by next year is at best filtered by rose-colored glasses.

P.S. to Thomson,

Oh and btw, this is hardly a radical view. Friedman of NYT states pretty much the same thing. As a booster of the concept of the war, but a critic of its conduct his tension is emblematic of many Americans who didn't have a problem with following GW Bush into war but have major doubts about his conduct in executing it. In real life, a good idea means nothing without execution. There has to be follow-through and delivery of results. GW Bush has demonstrated none of the above.

“In other words, Paul Krugman is correct in that there is a Great Unraveling going on.”

The investors and entrepreneurs disagree with you. Furthermore, they are also backing it up with more than a few of their own dollars. The American economy will probably only get stronger. Our economic system, political institutions, military power, educational options, and work ethic, will see us through the near and distant future. The Old Europeans are losers, but we are not.

Paul Krugman is angry because he is an leftist academic snob who believes that the world will go to hell in a handbasket unless it listens to him. All liberal economists, without exception, are intellectual egotists who want to run everything. It’s intrinsic to their nature. Why is Krugman so weird? That is very easy to explain. He and Brad DeLong are actually far to the right of the liberals dominating the academic institutions (they both consider a Ralph Nader to be nothing more than a nutball). This leaves them with a subconscious desire to prove that “I’m a Liberal, too.” Thus, they go out of their way to bash conservative every chance they get. They live by this motto: “You can call me a slime bag %$#*& and it won’t bother me a bit. But if you ever describe me as a conservative---I’ll sue you for slander!”

Thomson,

Tell your pretty story to the vast hordes of China and see if they care. Globalization is just neo-industralism. Instead of the Capitalist having his office above the factory floor, the exploited men, women, and children live in foreign countries. Ideally, the transfer of wealth should be available for new entrepeneurship and venture capitalism, but that's not what happens.

Because of the structural problem of capital gains, mostly it goes into financial speculation. That's why those "investors" are sending stock valuations sky high over modest earnings - and as the WSJ points out somewhat fishy smelling ones at that. The increased upper executive management and CEO pay is part of the problem. It's not recycled into the economy, instead its stuck in relatively low ROI fixed income or mature company investments.

So the stock market can become more and more inflated with the profits gotten from exploiting workers further and further away, and it won't help the *real* economy of jobs and trade at all. In fact, it will only exacerbate economic imbalances which imperil the whole market system. For instance the excessive real estate valuation is partly from all that loot looking for a safe place to rest, but the increased real estate prices are actually a drag on homebuilding and the economy in general.

Sorry, but that's the way it works your nihilistic market idealism aside.

>the exploited men, women, and children live in foreign countries

The Chinese workers come to the factories to work because the alternative for them is to live even worse lives on their tiny farms; I suppose Oldman would prefer that they stay there.

Sorry, but that's the way it works your nihilistic anti-market idealism aside.

Charles,

Ain't nobody saying that the Chinese run a prize economy, but two wrongs don't make a right and two economic missteps don't add up to making a buck. I don't care that much about Chinese peasants or factory workers, but this inversion of capital allocation flows is damaging the real economy. Ultimately, the exploited people I care most about are working stiffs like myself and possibly you. I don't care if some guy get's rich, but there's money and there's making money. Let the make money so long as it makes money for the rest of us. That's a social contract, which is different from some vapid market ideology that what is happenning is the most efficient distribution of opportunity.

How do we reconcile economic growth with the loss of tens of thousands of jobs in the same interim? Is the goverment going to claim that all, or even most losing their jobs in the last year, have been reabsorbed into this same reinvigorated economy? Where have they all gone? Are most still unemployed and just surviving on unemployment compensation extensions? These extensions eat up more potential investment capital and must eventually come to an end; without even making a dent in the unemployment problem.

The tax refunds have been long spent and a new round has been proposed. This method of trying to stimulate an economy is very short sighted to start with and can't continue to be relied on.

Some industrial stimulation, of course, occurs during a time of war. But that soon winds down and is never a desired way to stimulate anyone's economy. Then, you have another problem - downsizing your military/industrial complex; another contributor to unemployment.

I don't claim to know enough about economics to propose any solution but I do know that a very basic problem is that our population growth is too great to develop and sustain a commensurate economy to support it, while also fulfilling our international commitments.

Our government, advised by the wisest economic experts available at the time, has been knocking heads with the problems of the national economy for years. I fully expect this issue to be a continuing one for many more to come.

What we are witnessing is the “Frankenstein Economy.” In the classic horror film, the deceased body has been reanimated through the application of massive doses of electricity. Similarly, we have jolted the economy back to life via historical levels of tax cuts, interest rate cuts, increased monetary supply, devalued currency, and deficit spending.

As we move away from the initial stimulus, we are see its effects wane. The 0.2% drop in LEI may be reflecting that. Is this the beginnings of a new business cycle, or is it merely the temporary effects of stimulus? If it is the latter, we do not know what sort of problems this will engender if the body slumps back onto the slab.

Can Greenspan & Co. pull the economic levers just the right way to defeat the normal business cycle, bypassing the refractory period? What are the side effects if he cannot? Recent data points to a recovery that is entering a crucial phase. The next two quarters will reveal whether or not the patient has been reanimated or not.

The nightmare scenario is that the stimulus has merely temporarily “reanimated” the economy via incredible levels of stimulus -- you can make a dead body twitch by applying enough electricity -- that won't make the dead come to life, and I doubt it will defeat the business cycle . . .

Mr Ritholtz and Perez,

Kudos gentlemen for lucid analysis! That is absolutely correct. The liquidation portion of a business cycle only "works" if it removes poor competitors from the marketplace and converts underutilized assets into capital free to be reinvested into new entrepeurial ventures.

By lowering the interest rates aritificially beyond what is strictly necessary to dampen economic pullbacks, Greenspan has been making money increasingly available in low interest loans - and do not big companies always get the best rates? - to help them survive when they should be being run out of business and liquidated. This is partly why corporate governance is out of whack - there is no swift axe of competition and creditors drying up for mismanagement. No reality check. Strong's prosecution by Elliot shows that the story on that is far from over.

Indefinite low interest loans interfering with corporate business practice reforms is the story behind Japan's Depression.

Likewise, the dysfunctional capital gains and asset investment laws encourage wealth transfered by exploiting low-wage workers to low return on investment fixed income, mature company, or Finanicial speculation all of which is far away from risky venture capitalism or small business entrepeneurship.

This disrupts the capital liquidation to capital reinvestment stage of the business cycle. This means we get caught in a "trough" or oscillating back and forth in the bottom of the bad end of a business cycle - peaking only when we get juiced artificially - but whose stimulation only worsens the problem by delaying structural reform.

This is the Keynesian dead-end. Keynes wasn't wrong, but he also didn't foresee how stimulation would come to completely displace the working structural reform initiated by hardship and capital liquidation. A new balance is needed for economic progress.

Mr Ritholtz, Mr Perez, Mr. Oldman,

I don't know how long you have been around but I have been studying economics, markets and investments for 30 years.
I learned socialist economics first (Keynes) and have spent the last 30 years watching various Keynsians pontificate theory after theory and be shown utterly wrong time after time.
Our economy does not run as a perfect capitalist marketplace but, given the socialist politics that have been launched over the last 40 years, we've done a reasonable job of muddling through. As long as the government can be reasonably restrained from intruding too far into market freedom and flexibility I'm confident we will continue to muddle through with a pretty good amount of prosperity for some time to come.

Given human nature, freely exercised, there will continue to be economic booms and busts that are sometimes bubble sized. That's because people get scared, euphoric, boored and depressed, collectively, from time to time. The idea that any government mandated direction can improve on this messy but ultimately wealth producing process is ludicrous if you know anything about how the government runs itself.

Its a freaking miracle anything gets done in government. Sometimes its a miracle if anything happens in private business! But the beauty of capitalism is that it accomadates the ups and downs of human beings, gives them incentives to pick themselves up and move ahead, to improve.
The alternatives? No alternatives exist that don't involve more government coercion or control and, ultimately, total stagnation.

The "invisible hand" of the market may make mistakes and be clumsy but it self-corrects pretty fast as well. The fist of the government never relinquishes either its grip or its destruction without a horrific struggle.

Lighten up. Things aren't that bad from a historic perspective. As long as we keep growing, getting more free and restraining the size of government things will continue to improve (regardless of who is president).

Mr Ritholtz, Mr Perez, Mr. Oldman,

I don't know how long you have been around but I have been studying economics, markets and investments for 30 years.
I learned socialist economics first (Keynes) and have spent the last 30 years watching various Keynsians pontificate theory after theory and be shown utterly wrong time after time.
Our economy does not run as a perfect capitalist marketplace but, given the socialist politics that have been launched over the last 40 years, we've done a reasonable job of muddling through. As long as the government can be reasonably restrained from intruding too far into market freedom and flexibility I'm confident we will continue to muddle through with a pretty good amount of prosperity for some time to come.

Given human nature, freely exercised, there will continue to be economic booms and busts that are sometimes bubble sized. That's because people get scared, euphoric, boored and depressed, collectively, from time to time. The idea that any government mandated direction can improve on this messy but ultimately wealth producing process is ludicrous if you know anything about how the government runs itself.

Its a freaking miracle anything gets done in government. Sometimes its a miracle if anything happens in private business! But the beauty of capitalism is that it accomadates the ups and downs of human beings, gives them incentives to pick themselves up and move ahead, to improve.
The alternatives? No alternatives exist that don't involve more government coercion or control and, ultimately, total stagnation.

The "invisible hand" of the market may make mistakes and be clumsy but it self-corrects pretty fast as well. The fist of the government never relinquishes either its grip or its destruction without a horrific struggle.

Lighten up. Things aren't that bad from a historic perspective. As long as we keep growing, getting more free and restraining the size of government things will continue to improve (regardless of who is president).

Mr JAG,

If all you got underneath your belt on your end is just 30 years experience and conclusions like that, then you're the light weight in this particular discussion. Among other exploits in my life, I've written and submitted analysis that has predicted the Asian economic meltdown - several *years* before it happened; correctly market-timed the internet bubble - and put my money where my mouth was; and several other nifty tricks. This oldman didn't get through what he did without his trusty old thinking cap.

As a matter of fact, things aren't that bad historically. *But* they are gonna be so. It's gonna get allot worse. Oh not tomorrow, or the next day, but some years hence and what is happening now is just exacerbating the situation.

To see why, just look at major league baseball and football. Clearly, there have to be rules - on the field and off the the field. Otherwise there ain't no competition and ain't no game. The rules off the field got as much to do with what happens on the field.

Look at player salaries. Clearly, we can dispassionately see that while there is such a thing as intrinsic athletic ability we can see that how much it is valued in dollars - the "market" decision - is heavily influenced by the rules on and off the field. Players and coaches will tell you for instance that certain players try to maximize certain heavily scrutinized statistics, in order to maximize their contract bids.

Other times we can clearly see that a team has made a bad mistake with regards to a player. Other teams take advantage of this, and at least one MLB team specializes in picking players with moderate stats but high synergy to put together a low-cost high effectiveness team.

But the rules aint' separate from all this activity. The rules create and govern the marketplace. The decide valuations and outcomes, though not directly. They don't specify them, but they control them by controlling what goes into making them.

And if we can see this about something as ethereally artificial as pro sports, why can't we see that ultimately any market is not separate from its regulation but created by it?

Keynesians can pontificate all they want. However any distributed knowledge network - which is what a market is if you know what means - can only come up with good decisions if it has good rules. Yes, specific outcomes (like price controls) cannot be arbitrarily dictated. However if you know how, you can play a market like a violin. Or at least a rock-band.

There is no such thing as a dichotomy between "markets" and "regulation" insofar as making decisions regarding the economy. It's two sides of the same coin. Anyone who thinks otherwise is just plain ignorant.

And that's why things are getting bad. You can see it in the present rules of the system. And you can see it in the symptoms they're creating at the macro and micro economic level. Ain't so bad now, but it's gonna get worse. So sayeth the oldman.