Wednesday, February 11, 2009

Obama and the Establishment press, Week 3

The problem is not that we don't have enough money to buy stuff, it's that there's too much stuff for us to spend all our money on!

A couple of things stood out to me this past week about press coverage of the Obama administration. One is the astonishing economic illiteracy of our press corps. The other is their own unwillingness to talk about their own role in Obama's problems getting out his message.

For examples of the latter, I will refer readers to the re relatively new County Fair blog at Media Matters, which has been focusing on that failure during the past week.

While it's true that the press is unwilling to criticize its own conduct as part of the political establishment, a chronic and long-term problem, that doesn't mean there are no legitimate criticisms to be made of the political and public-messaging approaching of Obama and his administration. I've made a few of those myself.

It was the press corps' economic illiteracy that most bugged me this past week. And that illiteracy is very much related to the fate of the recovery bill, of course. And the Republican strategy of going after a bill by ridiculing isolated portions of it plays well to the press' inability to understand or convey economics concepts and also to their obsession with trivia and "gotcha" points.

My own pick for goofiness in that regard comes from Business Week, which is as good as it gets for business news. But then again, business news and economics aren't the same things. The article I mean is What Falling Prices Are Telling Us by Peter Coy 02/04/09 (02/16/09 issue).

The background to his article is the basic process of recession. Whatever the event may be that kicks off a recession - an oil price shock, a stock or housing bubble, high interest rates - a downward spiral occurs. People stop buying as many goods and services as they had been. Supplies start piling up in warehouses, service workers have less to do, profits drop. Unused productive capacity (aka, excess capacity) increases as production drops. Businesses start laying off workers. Laid-off workers and those concerned about being laid off reduce their consumption. More supplies start piling up in warehouses, and the process turns into a downward spiral

At some point, the private economy will bottom out. Which means that production will drop to a point, and people will defer purchases to a point, where the demand starts to exceed the supply as people start buying more. Production goes up, profits go up, businesses buy more supplies for themselves and hire more workers, who then spend more money. And the process goes into reverse, which is for most people a more satisfying situation.

This is Economics 101, if not high school economics. Respectable economic thought until the Great Depression generally held that there was nothing much governments could do to prevent or ameliorate this business cycle process. The economy would reach something like its "natural" bottom and the reverse process would begin, or in economics jargon, the markets would clear. The problem is, that "natural" bottom might devastate whole industries, bring the banking system to a standstill, and through huge numbers of people out of work. Conservative economics in America the last 30 years or so has held that the only useful interventions by government would be to cut taxes on the wealthy and rely on the Federal Reserve to manipulate the money supply, a task endowed with something like magical properties in the minds of conservatives.

Peter Coy seems to think he's made an important new discovery. Referring to the fact that prices in some sectors are falling while they are still rising in others, he writes:

This inconsistency in prices casts doubt on the usual explanation for the recession, which is that it's mainly due to the credit crunch and the resulting squeeze on demand. It also hints at why government efforts to fight the downturn have been ineffective so far.

Here's the big idea: If the lack of demand that the Obama Administration is fighting were the only problem, you'd expect prices to fall across the board. Instead, it appears that supply - that is, oversupply - is at least as important a factor. The sectors in which prices are falling are those plagued by an excess of factories and ways to get goods to consumers, often because of huge investment in plants in China and other developing nations. Most services, in contrast, are not in severe oversupply and have domestic labor as their main ingredient. Consider this: Prices of goods fell 4.1% last year; prices of services rose 3%.

The government's deflation-fighting weapons—low interest rates, financial bailouts, and spending packages—can boost demand but do little to deal with oversupply. As Microsoft (MSFT) CEO Steven A. Ballmer and General Electric (GE) CEO Jeffrey R. Immelt have observed, long-term demand growth has been "reset" downward. The world's productive capacity is simply too big. That means prices need to fall further, or more factories need to close in the U.S. and abroad, or some combination of the two. [my emphasis]
Get it? It's not that demand is too low, it's just that productive capacity is too high! You see, dude, the problem is not that customers don't have enough money to buy what's being produced, it's that more is being produced than people have money to buy!

My hand is not resting on the table, the table is resting under my hand! The reason my car won't run is not that it's out of gas, it's that there is no gas in it!

Coy's discovery is on a par with one of the deep economic insights that President "Silent Cal" Coolidge once revealed: When more and more people are thrown out of work, unemployment results.

The article, as you might guess, is pretty incoherent as a whole, not just in those three paragraphs. His deep economic insight means that Obama's recovery package might not address the right problem, he argues, but that doesn't mean that the recovery package won't help solve the problem. To be fair to Ballmer and Immelt, the one-word quote he attributed to them that long-term demand is being "reset" downward is not at all the same as the ditzy point Coy made out of it.

How does an article come out like this? Did an editor try to fix it and fail? Is he onto some new economic theory, Supply Side II or something? Was he trying to make a sensible argument and couldn't quite get there? Is he just playing with our heads? Take your pick.

I love this sentence: "The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global overcapacity is the most extreme." Or, more succinctly, the stimulus can ameliorate the downturn, but it can ameliorate the downturn. Because, uh, ameliorating the downturn would mean slowing down the process of the downward supply-and-demand spiral, which would be the most immediately effective in areas of the economy where excess capacity is smaller.

This reminds me of a former colleague of mine who had a unique way of making educational points. Probably my favorite of his was:

The thing about lawyers is, if you ask a lawyer, "Can I kill someone?", he'll say, "Yes, go ahead and do it, and we'll find a way to get you off."

But if you ask a lawyer, "Can I kill this particular person?", he'll say, "Yes, go ahead and do it, and we'll find a way to get you off."

So you see: it's all in how you ask the question!
Actually, I tried to figure out what Coy's underlying point might have been before it got badly mangled, assuming that's what happened. The best I could come up with is that maybe he started out trying to explain deflation, which is something that hasn't really been a problem in the US since the Great Depression, though it was in Japan in the 1990s. And at the same time, he was trying to make a "neo-classical" argument that government spending could only affect the course of a recession at the margins. Which would at least be an ideologically coherent argument, even though spectacularly wrong. But what came out sounds more like a case of dementia.

And with the quality business press putting stuff like this in its lead article, it's no wonder that Republican National Chairman Michael Steele thinks he won't be making a fool of himself when he explains, as he did to George Stepanopoulos this past weekend, that government spending doesn't create jobs, it only creates work.

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