Doug Henwood wrote:
Hmmmm, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test.
Good point. There's an upswing. Some financials will get fixed and debts will be rolled over.
But, as David says, that doesn't make the elements of vulnerability go way. The dollar has been sliding down and the current account deficit is still growing. In the 1990s, that wasn't a problem. But the world is different now. The conditions that fed the boom are not here anymore: the Soviet Union and Eastern European socialism (with or without quotes) cannot collapse again, the sense of stability and triumphant capitalist euphoria is gone. That was a one-shot event in history. A whole new geopolitical game may be starting, with China, India, Russia, and Japan positioning themselves. Still, no match for the U.S., but getting there. (And the "war on terrorism" has no end.)
The relaxed military budgets that allowed for deficit reduction are gone, stable and low oil prices are here no more, technological innovation may or may not be what it once was (there's debate, e.g., Stiglitz points to years of no investment in science and education; Stiroh believes innovation is just beginning, there's a self-reinforcing cycle, and a recovery will create the incentives for another round). The threat of terrorism inside the U.S. and conditions for a needed cycle of "class warfare" are here. On the other hand, in spite of restrictions to the immigration of skilled workers (and grad school applications), there's plenty of slack in the skilled labor market for now.
But let's not get too complicated here. Take the IS equation. Assume all you need to assume. Make the world real simple. In its simplest form, growth in real output is the negative of the autonomous spending multiplier times the i-elasticity of the demand function times the growth in i times investment/output (actually, the portion of demand not autonomous to i). No?
Back of the envelope, plug a multiplier of 1.4, an i-elasticity of aggregate demand of -0.025, an (big-item-consumption + investment)/gdp = 0.3. (If you don't like my numbers, use your own.) Armed with this powerful weapons, I solemnly predict a contraction 0.01% for every 1% increase in the interest rate. In an 11 trillion USD economy, it's a decline in 1.5 billion USD, or how many jobs?
Wanna bet?
Julio
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