The Meltdown Lowdown, No. 17

Dean Baker
The American Prospect Online, August 8, 2008

See article on original website

This week in economic news: Economic growth and employment turn out to be lower than we thought, liberals miss an opportunity on oil drilling, and why does John McCain think real men have flat tires?

The Bush-McCain Recession

While John McCain was busy complaining about Obama's similarity to Britney Spears and Paris Hilton, the Commerce Department released new data providing more evidence that the economy has in fact sunk into a recession. The new data show that the gross domestic product grew at a 1.9 percent rate in the second quarter of this year and that growth in the fourth quarter of 2007 was -0.2 percent (revised down from a previously reported 0.6 percent positive growth rate). Since the fourth quarter was when the economy first started shedding jobs, this makes it a likely starting point for the dating of the second recession of the second Bush presidency.

Also interestingly, a decreasing trade deficit added 2.4 percentage points to the GDP growth rate for the quarter. This means that, without the reduction in the trade deficit, instead of growing 1.9 percent in the second quarter, the economy would have shrunk by 0.5 percent. In fact, without the boost from an improved trade picture, the economy would have been contracting since the third quarter of last year.

The improvement in the trade deficit is the direct result of the sharp drop in the dollar over the last two years. The lower dollar has made our exports cheaper to people living in other countries, causing them to buy more of our exports. It has also made imports more expensive, leading us to buy fewer imports. But it is not clear how much more the deficit will improve in future quarters, both because other countries may impose barriers to U.S. exports and because economies around the world are slowing. So, the much needed good news on trade may not continue.

Bad Jobs Report Means that Losing Candidates Will Have Company

The latest employment numbers show that the unemployment rate rose by 0.2 percentage points in July to 5.7 percent, the highest unemployment rate in four years. Other measures of labor-market weakness showed an even worse picture: Both the number of people who have given up looking for work and the number involuntarily working at part-time jobs continued to grow. The number of people who have given up looking for work rose by 313,000 from its year-ago level. Over the last two years, the number of people working part-time who would like full-time employment has increased by 1.7 million.

Meanwhile, the Labor Department's survey of businesses reported a loss of 51,000 jobs in the economy and a loss of 76,000 jobs in the private sector. The economy as a whole has now shed jobs in seven consecutive months, while the private sector has been losing jobs for eight months. This sort of sustained job loss has never occurred except in periods associated with recessions.

There seems little prospect that the job picture will turn around soon. Large layoffs have been announced in airlines and finance, and retail and real estate are virtually certain to shed jobs given sharp falloffs in demand. State and local governments will also start to cut jobs as their budgets are pinched by the tight economy.

The other piece of real bad news in this picture is that wages are now lagging behind inflation badly. Wages are growing at just over a 3 percent annual rate with inflation now running at well over a 4 percent annual rate, driven by energy and food prices.

The Drill and Tax Compromise: An Alternative to Waterboarding

Sen. McCain and the Republicans have been making claims about oil drilling in offshore protected areas that are not true (we call these "lies"). They have been telling voters that if we just let the oil companies drill in environmentally sensitive areas, it will bring down the price of gas. The problem with this claim is that the Energy Information Agency's estimates indicate that there is not enough oil in these areas to affect gas prices by more than a cent or two; even that impact would take 10 to 15 years. However, most of the electorate has been led to believe (partly by horrible news reporting) that it actually is possible to bring down gas prices by opening up more areas for drilling.

While we could yell "liar, liar, pants on fire," there is an alternative approach. We can just take Sen. McCain and the Republicans at their word and give them a green light to drill everywhere in sight.

However, we should also insist on a quid pro quo. Since the Republicans have assured everyone that drilling will bring down the price of gas by supplying more oil, we put in a big windfall profits tax that will kick in if the price of gas rises above $3 a gallon. They should have no objection, if they believe what they are saying about drilling resulting in lower gas prices. So what do you say John?

Alan Greenspan Believes in the Housing Bubble

That's right, after denying that there were any serious problems in the housing market, Greenspan wrote in an article in the Financial Times on Monday that he expects house prices to continue to fall much further. Furthermore, he warned that financial markets will not stabilize and that the economy will continue to suffer, until house prices stop falling.

So, it looks like Greenspan has now decided that there was a housing bubble and that its collapse is leading to serious financial and economic problems. If only he'd been chairman of the Fed at a time when this crisis could have been prevented!

Real Men Have Flat Tires

This seems to be the Republican talking point of the moment. After Barack Obama noted that we waste huge amounts of gas because the tires on many cars are under-inflated, Sen. McCain and the Republicans decided that properly inflating tires was a ridiculous way to deal with high gas prices.

Personally, I would rather pay less money for gas, so I generally try to keep my tires at their recommended pressure. But if Sen. McCain and the Republicans think that properly inflated tires are a threat to their manhood, then by all means they should keep their tires as under-inflated as they want. In fact, maybe they should drive without tires at all. That would be really macho. Then we can all look forward to an election day on which the Republican voters speed to the polls driving on their wheel rims.

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.