ECONOMIC UPDATE--SLOWER GDP GROWTH & DEFLATION

by Bill Breakstone, Somers, NY, August 2, 2010

The other afternoon, I ran into two old friends in front of the local CVS store. The wife is an old colleague of mine in real estate; since I make it a point not to discuss anything controversial with office friends, I had no idea of her stances on either politics or economics. Her husband is a retired IBM executive, whom I had met socially on several occasions over the years, but with whom I had never discussed anything of real substance; in any case, he had always been cordial, if not down right pleasant.

They had just returned from a trip to China, and had found it extremely interesting and educational. We got to talking about the differences between the Chinese and American economies, and this quickly led into a discussion of how China was “on the rise” while America was in relative economic decline. That’s when the conversation started going downhill quickly. My friend’s opinion was that the U.S. economy would do just fine, if “government” just got completely out of the picture. To say that I found his statement to be incredulous would be an understatement.

In my opinion, if the recent financial crisis proved anything, it was that the deregulation of the American economy over the past three decades was responsible for bringing the world to the brink of economic catastrophe and a second Great Depression. But my friend is not alone in believing that what we need is more of the same.

The news over the weekend was dominated by economic discussion. Friday’s Bureau of Economic Analysis Report on Second Quarter GDP growth was disappointing to most economists and economic commentators, and this coming Friday’s Labor Department Report of July unemployment is expected to be no less so. Sunday’s media was filled with some very interesting, if not depressing, views from a number of notables concerning where our economy stands and future short- to mid-term prospects.

Fareed Zacharia led off his “GPS” program on CNN with a brief analysis of the debate between so-called budget hawks and stimulus advocates. His advice was that of most “experts”—continue fiscal stimulus in the short-term to spur economic activity and bring down joblessness while advocating budget reduction in the medium term through revenue raising measures and decreased discretionary spending.

On NBC’s “Meet the Press,” David Gregory hosted a distinguished panel of Alan Greenspan, Governor Ed Rendell of Pennsylvania, and New York Mayor Michael Bloomberg for another roundtable concerning our stagnating economy. Greenspan had some interesting and unexpectedly surprising observations. He advocated completely doing away with the Bush tax cuts, across the board! He also said he had never, in his 51 years of experience in the financial world and government service, seen such a disconnect than what now exists between government on the one hand and business interests on the other, and sees it as extremely harmful to the economic well-being of America. Bloomberg and Rendell hedged on the complete elimination of the tax cuts, advocating maintaining them for middle- and lower-income earners, while eliminating those for the upper brackets, as those savings don’t get spent while at the lower level those savings go directly back into the economy via consumer expenditures.

In his column this morning, Princeton economist and New York Times columnist Paul Krugman made some blistering comments on the position of deficit hawks in urging budget cuts and the Federal Reserve for its inaction in taking needed monetary actions to spur spending. He said the result was a developing structuralization of unacceptable levels of unemployment. “I worry that those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is “structural,” a permanent part of the economic landscape—and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality.” The Times’ Bob Herbert had similar comments in his op-ed piece on Saturday.

The other issue being argued is the threat that with sluggish economic growth and high unemployment, the economy is coming dangerously close to repeating the disastrous “Lost Decade” that Japan experienced from 1991 to 2001. Joe Kiernan, on this morning’s CNBC “Squawk Box,” had an extended debate with Jason Rooney, who was maintaining that there was no expectation on the part of the American consumer that prices would decline and thus cause postponement of purchasing decisions. If anything, he said, consumers believe that prices will rise. To which Kiernan was obviously disbelieving, in that almost every economist holds the opposite opinion. As the host said, since when do we trust the American public to make policy decisions for as complex an issue as this?

This brings me back to my friend’s comments mentioned at the start of this piece. How can seemingly intelligent business people be so oblivious of economic reality?