Bad times here to stay

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, Mar. 24, 2003
OP-ED CONTRIBUTOR
Battling the Fog of Finance
By JAMES GRANT

War has enough to answer for without being blamed for problems not of its 
own making. Last week the Federal Reserve excused itself from venturing any 
forecast about the United States economy pending the abatement of 
"geopolitical uncertainties."

But it isn't the fog of war that has shortened the vision of our monetary 
policymakers. It's rather the fog of finance, particularly the long legacy 
of America's greatest stock-market bubble. The truth about the three-year 
decline in stock prices and the hot-and-cold-running economy is that they 
have their roots in prosperity, not in war.

The paradox is easily explained. High stock prices invite capital 
investment. Ultrahigh stock prices invite redundant capital investment. 
Stock prices higher even than those on the eve of the 1929 crash invite 
titanically redundant capital investment. No wonder, then, that business 
spending on new plant and equipment has been so weak for so long: The 
sky-scraping stock market of the late 1990's (which indeed commanded 
valuations higher than those of 1929) induced enough corporate spending to 
sate demand and cause a recession.

That recession, which began in March 2001, is probably over by now (the 
official cyclical timekeeper, the National Bureau of Economic Research, 
continues to weigh the evidence). But the recovery is heavy-footed and 
faint-hearted. High energy prices and stay-at-home travelers haven't 
helped. Nor has worry about a new terrorist attack. But the source of 
America's persistent financial aches and pains is something more basic: the 
preceding mispricing of capital.

In the manic phase of the bull market, capital was essentially free. The 
frittering away of American savings wasn't intentional. It happened 
inadvertently, through investing: in telecommunications equipment, 
semiconductor manufacturing plants, computer servers, power generators, 
office furniture, Internet initiatives, etc. We invested more than we 
should have ? in fact, more than we had. We borrowed to invest, from 
creditors both domestic and foreign.

And because the law of supply and demand is everything it's cracked up to 
be, the bull market ended. More productive capacity spurred higher output, 
which led to more intense competition and ? no surprise ? to lower profit 
margins. And those things led to lower stock prices, which, in turn, led to 
a crash in capital investment.

There was no "new economy" after all. Now almost one-quarter of corporate 
productive capacity is lying idle. All too many job seekers find themselves 
in the same predicament

full: http://www.nytimes.com/2003/03/24/opinion/24GRAN.html

===

NY Times, Mar. 24, 2003
Skeptical Economic View Takes in More Than Iraq
By DAVID LEONHARDT

With the battles having begun in Iraq, the United States economy once again 
looks as if it might be on the cusp of emerging from its torpor. The 
Standard & Poor's 500-stock index rose more last week than it did during 
any week since September 2001, and Wall Street forecasters predict that a 
quick military victory will reduce economic uncertainty, causing a surge of 
corporate and consumer spending.

But this has become a familiar refrain. A year and a half ago, many 
economists said that the country would prosper as soon as it recovered from 
the Sept. 11 attacks. Early last year, the scandals at Enron, Worldcom and 
elsewhere were supposed to be all that was preventing a new boom.

With each new month of layoffs and other corporate cost-cutting, however, 
the exceptions begin to look more like a rule. Increasingly, corporate 
executives and some economists worry that the slow-growth economy of the 
last three years might in fact be the new reality, one that will bedevil 
workers and investors for a few more years.

"When it all comes out, we're going to have a significantly less sanguine 
outlook than we did in the late 90's," said Dale W. Jorgenson, an economist 
at Harvard University and an expert in productivity, widely seen as the 
most important factor for future growth. "That's something we're just going 
to have to get used to."

full: http://www.nytimes.com/2003/03/24/business/24ECON.html


Louis Proyect, Marxism mailing list: http://www.marxmail.org


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