Sunday, March 29, 2009

Robert Reich, Soothsayer?

TAP-200904

In the April issue of The American Prospect, former Secretary of Labor under Clinton, and author of Supercapitalism, Reich puts forward his predictions about the American economy. The article begins:

“I've got something of a reputation as an economic soothsayer. Last March I predicted the economy would slide off a cliff in six months. Six months later, it did. How did I know? I'll get to that later. Now, I'm predicting the economy will start to recover in the second quarter of next year.”

Beyond its rather self-important tone, Reich has some good things to say and back up his position. He says it’s important to look at the fundamentals (without saying they’re “strong”, as we know how dangerous that can be), and that in business “what goes down eventually comes up”.

“look at the economic fundamentals -- such as historic ratios of home values to rents and incomes and of stock prices to corporate earnings. At the rate houses and stocks are now dropping, they'll be terrific bargains by the middle of next year. Meanwhile, given how fast business inventories are now dropping, firms will probably start rebuilding by then. Business investments in plants and equipment are now nearing a standstill, so by the third quarter of next year companies will need to replace lots of aging equipment. On the consumer side, the sharp falloff in spending on durables means lots of cars and appliances will begin wearing out by the middle of next year.”

Reich’s argument is that in order to guarantee the traditional mid-term losses in congressional majorities that afflict almost every president, Obama has to have something to show for the stimulus come election day. In order to do this, Reich says, Obama might have to ask for a second stimulus from Congress. Republicans will likely try to block this, as (in a rather unpatriotic display of cutting-their-noses-off-to-spite-their-faces) “the last thing they want is an economic recovery by the midterm elections.”

Obama’s approach to the Wall Street and Big Three bailout could prove pivotal:

“The wild card is the mammoth bailouts of Wall Street and the Big Three, which most Americans almost uniformly oppose. Congressional Republicans claim to be outraged -- outraged! -- as well. So far, Obama has been treading a fine line between criticizing the bailees and still giving them what they want.”

The danger of higher interest rates which could choke off recovery from seeking more government borrowing from Japan and China (the latter growing feisty about possibly moving away from the dollar as a reserve currency), and the possibility of not getting the stimulus from Congress put Obama and his administration in a difficult position. Reich, however, thinks that Obama will be forced into some rapid triage, which could start showing results by the time voters need to wake up again. Reich makes a lot of his prediction about the crash. Let’s hope he’s right with this prediction, too.

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