The Meltdown Lowdown, No. 12

Dean Baker
The American Prospect Online, July 3, 2008

See article on original website

This week in economic news: The Times confuses the stock market and the economy and worries about a shortage of Europeans while McCain claims to want to hold economists accountable.

The NYT Confuses the Stock Market and the Economy

The New York Times noted Saturday that the Dow, on Friday, briefly hit a level 20 percent below its previous peak. Such a drop is the definition of a bear market, but there is little reason for most people to really care about this milestone because the Dow is not representative of the whole stock market (the S&P 500 is a much better measure) and the vast majority of Americans own little or no stock. (And we would want to look at inflation-adjusted numbers in any case.)

Movements in the stock market bear only a loose relationship to the overall health of the economy. While The Times tells us that periods of bear markets "coincided with geopolitical or economic turbulence -- wars, the Depression, stagflation," in reality the stock market and the economy can go in opposite directions for substantial periods of time. This is best demonstrated by the bear market that ran from 1965 to 1982, the first 8 years of which were actually one of the most prosperous periods in the country's history.

From 1965 to 1973, the unemployment rate averaged 4.5 percent, gross domestic product growth averaged 3.9 percent annually, and the real average hourly wage grew at a 1.7 percent annual rate. In fact, real wages for a typical worker grew more during the first 8 years of this bear market than in the subsequent 35 years.

The economy clearly faces very serious problems in the years ahead due to the collapse of the housing bubble, the correction from an overvalued dollar, and the adjustment to higher oil prices. It is likely that these developments will also have a negative impact on the stock market, but the market itself is a very poor measure of the state of the economy.

I Win McCain's Economist Challenge. What Do I Get?

When Sen. McCain was told that no economists support his plan for temporarily reducing the gas tax he said: "You know the economists? They're the same ones that didn't predict this housing crisis we're in. They're the same ones that didn't predict the dot-com meltdown. They're the same ones that didn't predict the inflation that's staring us in the face today.''

Well, I did predict the housing-market meltdown back in 2002 and have been warning about it belligerently ever since. I also predicted the dot-com meltdown (actually, the collapse of the stock bubble). I even saw the inflation staring us in the face long ago.

That makes me three for three. So, do I get to tell McCain that his gas-tax proposal is stupid?

Scorekeeping on the Housing Bill

I appreciate Sen. McCain's effort to hold economists accountable for their failings. Economists believe that it is very important to be able to fire other workers when they mess up on their jobs, but they get very upset when anyone tries to hold them accountable for their performances.

In that vein, I would like to see some money set aside in the housing/banker bailout bill to assess whether bankers or homeowners get more of its benefits. The accounting should be fairly simple. Every penny that it costs the government to make good on the guarantees is money for the bankers. This is money in excess of what the bankers would have been able to get on their bad loans without government aid. By contrast, the money homeowners get to pocket (after we have deducted their selling costs and the principle payments they made on their mortgages) is money for the homeowners.

My bet is that the bankers will end up with considerably more money than the homeowners will. Of course, if Chris Dodd or Barney Frank really believes the claims they make about their bills, they should insist that the FHA set up some sort of scorekeeping mechanism along these lines. After all, wouldn't you want an independent agency to produce the data to show the success of your program?

Thus far, I don't think the bill includes any such effort at record collection.

The European Shortage

We all know about the shortage of oil sending gas prices through the roof. And of course, shortages of rice and corn have sent the prices for these commodities soaring also. But, what about the shortage of Europeans?

Well, if you aren't concerned about running out of Europeans then you obviously didn't read the section of last Sunday's New York Times Magazine. The magazine's cover story was a 10-page warning that the populations of most European countries are shrinking, several at what the Times deems an alarming rate.

Actually, much of the piece was devoted to a useful discussion comparing the family-friendly policies in several European countries (France and the Scandinavian countries) with the much less family-friendly policies in Southern and Eastern European countries. It would be nice to see the U.S. adopt similar measures.

The real problem was the rationale given for these policies. We should want parents to be able to raise kids without experiencing unnecessary hardships. And we should ensure that children are raised in a healthy environment. But why would we worry about too few children and a declining population?

If we have a smaller population, then our country is less crowded. Are we supposed to be upset if we have room at our beaches and parks and no traffic jams at rush hour?

If we had fewer workers, less-valued jobs would go unfilled. We would have fewer people paid to clean toilets in hotels or beĀ  domestic workers in private homes. Fewer people would wait tables in restaurants (yes, it would cost more to go out to dinner) and work as parking lot attendants. And convenience stores would have to close at 11p.m. because there would be no one to work the late night shift. Does that sound like the apocalypse?

The scaremongers then tell us that we will have to tax people more to support a larger population of retirees. That's right, but we already pay higher taxes than our grandparents -- are we poor as a result?

In fact, a labor shortage will produce higher wages. In addition, the declining population should mean that housing falls in price since there will be an oversupply. Rent currently takes up about 30 percent of our spending. So, if our population declines, our children and grandchildren can look forward to much higher wages and much lower housing costs. Are we supposed to feel guilty if their taxes go up by 3 to 4 percentage points over the next 30 or 40 years? I'll leave that one for the political demagogues.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.