I have been amused for the last several months by the efforts of my friend Gene Sperling, late of the Clinton White House, to somehow blame the current economic slowdown on George W. Bush. His theory, frequently repeated in the liberal media, is that Bush caused the slowdown by talking it down.
However, this theory has been invalidated by the recent swarm of Democratic support for a $60 billion tax rebate, offered by Sen. Joe Lieberman, Connecticut Democrat.
At least Lieberman is acknowledging that the slowdown is caused by real factors. Presumably, if he believed the Sperling theory, all he would have to do is tell Bush to start talking up the economy. After all, if presidents can talk the economy down, then they must be able to talk it up, as well. This raises the question of why Bill Clinton bothered to put forward an economic stimulus plan in 1993, two years after the recession was over, when all he had to do was tell everyone that the economy was OK!
Of course, the problem is that President George H.W. Bush did exactly that. He and his Treasury Secretary, Nicholas Brady, were very optimistic throughout 1992. But all this did was bring forth attacks that the earlier Bush administration was totally out of touch. Indeed, Democrats weren't the only ones who thought so. Many Republicans also believed that Bush was living in some kind of dream world, unaware of just how serious the recession of 1990-91 was.
Needless to say, none of these critics ever blamed Clinton for talking down the economy. He went across the country throughout all of 1992 telling everyone that it was the worst economy since the Great Depression. This was utter nonsense. The recessions of 1973-75 and 1981-82 were far worse. Yet no one seriously questioned his characterization. Where was Sperling then, warning his boss that he was talking down the economy and potentially turning a mild downturn into something more serious?
It would be too easy to say that Clinton and his advisers were deliberately talking down the economy to aid his election chances. The truth is that many people believed Clinton because of the actual economic circumstances they were faced with. In other words, his characterization of the economy would have fallen on deaf ears if there weren't something real underpinning it.
The fact is that the economy was still in the doldrums in 1992 and no amount of Bush talking it up or Clinton talking it down had the slightest impact. The same is true today. The economy is in a slowdown. This slowdown began more than a year ago, according to official government data. And nothing that Bush says or has said had anything to do with it.
A problem that both sides are having, politically, in dealing with the slowdown is that it is not like those of the past. In particular, the unemployment rate has barely budged, despite daily announcements of layoffs at various high-tech companies. I think this is evidence that there really is a "New Economy."
One reason for the modest amount of layoffs, in the context of the total labor force, is that the people being laid-off are finding new jobs relatively easily. My theory is that there are a limited number of people at present technically skilled to create websites and do Internet-related work. For some time, they were locked-up in the dot-com bubble, working for peanuts and oodles of stock options. It was a once-in-a-lifetime opportunity to become seriously rich. And for a while, it seemed to pay off.
The problem was that most of these dot-comers couldn't realize their profits because of laws that prohibit "insiders" from selling their stock. So the money was all on paper. When the bubble burst, they were often left with nothing.
But, they still have skills of great value, just not as much as they thought. In the meantime, there were many "Old Economy" companies that needed the skills of these "New Economy" workers but couldn't afford them. The result was a misallocation of labor from the former, where it was needed, to the latter, where it was wasted for about two years.
This labor is currently being reallocated from bankrupt "dot-coms," where it created little of lasting value, to traditional businesses, where it has great potential for raising efficiency and profits.
Now we see all these programmers and web designers, who would never take a job without bundles of stock options, happy to take jobs with a steady salary and benefits. The result is that the New Economy will spread into the Old Economy much more rapidly, which will raise growth for the economy as a whole, both in the short- and long-term.
We are also seeing evidence that companies are being more conservative about their layoffs than in the past. Having just come through a period labor shortage, they are not about to give up prized employees easily just because sales have taken a temporary dip. Thus, in contrast to the 1970s and 1980s, when companies were quick to cut labor costs through layoffs, today's companies are being much more cautious, which is why the unemployment rate has remained low despite the slowdown.
Another factor lessening the impact of the slowdown is the very fact that many workers in the New Economy have flexible compensation packages. Their salaries and benefits are small, with stock options making up the difference. But options are not guaranteed and when the stock price dives, so does many employees' compensation. That's bad news for them, but from the point of view of their employers it's good news. They are not stuck with cash flow requirements they cannot meet. The result has been that the falloff in revenue at many New Economy companies has been absorbed more easily than at Old Economy companies saddled with union contracts. The only way they can cut labor costs is by laying off workers.
My inclination is to believe that we are not in a recession, defined as 2 quarters of negative real economic growth. I think we are hovering around zero but won't actually get into negative territory for 6 straight months. As long as the Fed keeps easing interest rates, we should see a rebound by late summer.