Monday, December 31, 2007

The Economy: The Best and Worst of 2007

The Century Foundation released it's year-end economic assessment for the world and U.S. economy.

The study, by Bernard Wasow, is a mixed bag of economic indicators, signs, tea leaves and results. Wasow sorts them out and makes clear the decidedly unclear economic picture that was 2007.

The Best and Worst of 2007: The Economy

By Bernard Wasow

This past year may be remembered as an economic turning point for the United States. It was not a bad year, as far as production and employment go, but throughout the year, the signs of bad times ahead have been mounting.

And while the United States seems to be losing economic steam, European economic unity and cooperation has been gathering strength, with much of Asia continuing its sprint toward the head of the economic pack. In short, we end 2007 poised for economic troubles that may challenge U.S. economic supremacy.

On the good side, the U.S. economy has weathered continuing bad news without panic or collapse. On the bad side, we are likely to move into recession in 2008, from which the U.S. economy will emerge into a multi-polar economic world, with the United States only one of the big boys, not the dominant player is has become accustomed to being.

The Best

The best economic news of 2007 was the bad things that had not happened:

- Economic growth continued, though it will not reach 2 percent for the year. The unemployment rate for the year will come in below 5 percent, low by historical standards. The economy produced these respectable numbers even after the housing bubble burst.

- Household incomes continued to grow at the top of the income distribution and stagnate for the rest, the pattern of the past thirty-five years. The continuing growth of income inequality has produced rapid growth of federal tax revenues, delivering indirect evidence of progressivity in effective taxes, which is good news.

- In spite of a huge (though reduced) continuing U.S. international deficit, foreign wealth holders continued to absorb dollars, providing finance for our fiscal deficit and private saving shortfalls. As a result, while the dollar continued to decline, interest rates remained low and we were spared a currency crisis (for now). The falling dollar also stimulated U.S. exports.

- Outside the United States, the economic picture is promising (aside from the long run challenges of climate change and water scarcity). The economies of China and India continued to boom, joined at a more modest pace by much of the former Soviet block as well as several Latin American countries (notably Argentina).

- In much of Sub-Saharan Africa, economic growth continued to outpace population growth, which continues to decline.

- As in 2006, the threat of self-destructive anti-immigrant policy continued to find a large audience in the United States, but nativist action has lagged the rhetoric.

The Worst

The bad news for 2007 carries gloomy implications for 2008:

- As the financial industry chokes on the consequences of terrible mortgage underwriting, the threat of a liquidity crisis grows, putting at risk not only millions of ill-advised home buyers, but also financial institutions worldwide that acquired "contaminated" securities.

- The real consequences of the housing bubble - no more real estate projects entering the construction pipeline - together with the financial consequences, have made a recession in 2008 increasingly likely.

- Faced with the need to raise revenue, especially to reform the Alternative Minimum Tax, the Senate shied away from responsible Pay As You Go tax reform and jury-rigged a "fix."

- Domestic infrastructure and social needs continued to go unmet while U.S. wealth, as well as blood, drained into the sands of Iraq.

- Wealth-holders the world around - notably our creditors in China - demonstrated declining faith in the dollar and a wish to diversify their assets into harder currencies, especially the Euro.

- The HIV-Aids crisis remained catastrophic in much of Africa and a growing threat in Asia.

- While the threat of global warming is causing real popular concern, public policy has shown more bark than bite. In the United States, as well as in China, even the bark lacks conviction. The Bali Conference avoided a public breakdown, but at the cost of not producing any substantive resolutions.

- In the United States, policy to promote corn-based ethanol will continue to raise the price of food, which, together with the rising price of energy, will hurt low-income families worldwide.

At the end of 2008, the news probably will be considerably gloomier. The "American Century" may be nearing its end.
We don't agree with all of Wasow's assessments, but he's the economist. While we don't agree with everything, the report does make interesting reading. There's something for optimist and pessimist alike, particularly the pessimists.

Must be why Economics is referred to as "The Dismal Science".

About the author, Bernard Wasow:

Bernard Wasow received his BA from Reed College and his PhD in economics from Stanford University. In between, he spent a year as a DAAD Fellow at the Free University of Berlin. He has been a member of the Economics Departments at the University of British Columbia, the University of Nairobi (five years), New York University (20 years, tenured) and, as a visitor, at Columbia University, Monash University (Melbourne, Australia), and the Central European University (Prague, Czechoslovakia). He also has worked in the research department of the Federal Reserve Bank of New York and as a Program Officer at the Ford Foundation. Besides teaching overseas he spent a year each in Puerto Rico, with the Committee to Study Puerto Rico's Finances, and Bangladesh, with the Harvard Institute for International Development. He has participated in two World Bank missions to Kenya and two to Mongolia, the second of these as mission leader. His publications are in the fields of international economics and development.

About the Century Foundation:
The Century Foundation conducts public policy research and analyses of economic, social, and foreign policy issues, including inequality, retirement security, election reform, media studies, homeland security, and international affairs. The foundation produces books, reports, and other publications, convenes task forces, and working groups and operates eight informational Web sites. With offices in New York City and Washington, D.C., The Century Foundation is nonprofit and nonpartisan and was founded in 1919 by Edward A. Filene.

NOTE: DBKP tried contacting Wasow for a little more detail to his assessments, but he was unavailable. We'll try again after the first of the new year.]

notes by Mondoreb
* The Century Foundation: The Best and Worst of 2007: The Economy
* Bernard Wasow


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