Wednesday, July 11, 2012

ECONOMY OF THE '90S -- to counter some dishonest claims of the 2012 campaign


This article published in full in the Virginia Gazette, a Tribune Company, on 01/Nov/2004
It is being posted here as promised to a Facebook conversant, Bobbie Bebber,  on 07/10/2012
It is intended now, as it was in 2004, to put some truth into the dialogue about the economy and what drives it. Next I will post a piece on the 2008 meltdown to try to counter the nonsensical assertions of the so-called "failed policies of the past." Bush policies, of course. Not at all true.
 
To: Editor, The Virginia Gazette
From: Joe Mann
October 30, 2004

Economic factors of the ‘90s: Part 2

In the presidential campaigns much has been said and written to compare the economy and job creation in the Clinton administration versus that of Bush. Much is misleading and much is just plain wrong. A study of the economy back to the FDR administration is revealing. While space doesn’t permit a complete treatise here, a summary of conditions during the Clinton and Bush years can be informative.

Of the many factors that affect the economy, and hence job creation, oil prices and interest rates are common threads. One or the other, or both, can be found as common denominators in all so-called “business cycles.” Superimposed upon these common factors are extraordinary ones.

Clinton in ’92 and Bush in 2000 took office under vastly different conditions.

The recession of ’91, fueled by the double impact of interest rates that peaked at 9 ¾% (Fed Funds rate) in ’90 and oil prices that shot up from less than $20/barrel to $44 in ’91 during the Persian Gulf war.

By mid-1992 the Federal Reserve drastically reduced the Fed Funds rate to 3% to help halt the recession that they had helped fuel. The rate stayed low until the Fed increased it to 6 ½% in 2000. This rate promoted a long bond inversion that always presages a recession. Investors and economists never bet against interest rates and never doubt an inverted long bond yield curve! The recession of 2001 had started for Bush. Then came the devastating effects of the attacks of 9/11. I will not elaborate on this event.

After the Persian Gulf War, oil prices plummeted to as low as $9/barrel, rising to the mid-teens for many months before leveling at about $20-25/barrel during most of the ‘90s.

A look at how interest rates and oil prices can affect the economy is revealing.

During the Carter administration Fed Funds rates stayed in double digits and peaked to an astronomical 20% in late ’80 and early ’81 – a huge factor in the economic malaise for which the administration became known.

As for oil, Americans consume 20 million barrels per day. The more than $20/barrel increase in price in ’91 took more than $400 million/day out of the general economy and led to higher prices for almost all of what we consume – 40 % of oil usage is for gasoline!

Conversely, when the Gulf War ended oil prices came down by about $30/barrel, effectively putting upwards of $600 million/day back into the pockets of consumers and businesses. Can anyone doubt the economic impact of such a huge swing from an outflow of $400 million/day to an inflow of $600 million/day? A huge benefit to the Clinton administration.

A look at extraordinary effects on the economy of the ‘90s is even more revealing:

Corporate capital expenditures reached unprecedented levels – most of it fueled by the internet craze. And, while the internet has matured and become a vital part of business and personal transactions, it has not supported the huge capital outlay.

Telecoms alone were spending at rates of $60 to $80 billion/year during much the ‘90s, most of it on thousands of miles of high speed fiber optics – for the internet age.
Today, less than 3% of the fiber optic cable is lighted, outfitted and in use. And, the telecom industry is in shambles.

Investments in new internet-oriented businesses poured billions of dollars into the economy – much of it wasted, but it was spent and the economy benefited. IPO’s sprung up on Wall Street like weeds in an untended field. A prominent term in the investing world was “burn rate,” as untested managers spent with reckless abandon. Some of these start-ups have survived, some flourish such as Google, but most have died.

The Y2K effect, a “problem” that proved not to be, was a huge economic factor in the ‘90s that is discussed by no one.
The Gartner Group estimates expenditures on Y2K to be $200 billion direct expenditures in IT (+ $100 Billion in litigation costs) in US businesses and government and up to $600 billion worldwide.
Since the US controls 60% of IT the business, it is legitimate to add to the $200 billion another $200 billion that was spent by foreigners in the US.
Most of the expenditures occurred from 1995 to 2000 according to Dr. Leon Kappelman, chair of the SIM Y2K Working Group.

Corporate fraud became rampant in the ‘90s. The full effect of this is not known, but huge amounts of money made on paper in the ‘90s evaporated by 2000 as fraud was revealed in many companies – WorldCom, Global Crossing, Quest, Enron, Arthur Anderson, Ernst and Young, and more and now Insurance companies. There will be more.

Finally, it is appropriate to point out that the claims by supporters of President Clinton, even by Robert Rubin, that the tax increase of Clinton fueled the ‘90s economy by taking pressure off the bond market is not only counter-intuitive but has been thoroughly debunked with data by many including the Wall Street Journal. To give credit where it is due, I believe Rubin and other experts have backed down from this claim. But, as recently as the Democrat convention, comedienne/activist Jeanene Girafolo espoused it in an interview that included Robert Reich. Reich’s explanation of the ‘90s boom was, “we invested in education and health care which made people more productive – and he is a Berkeley professor!
Further to give credit, there was much that Clinton could have done to damage the economy of the ‘90s, and many in his administration tried – Hillary’s health care proposal for one. But, Clinton did not interfere, as did Carter. He governed as a centrist and that was positive for the economy.

With much misinformation in the public, I felt compelled to give some alternatives that can be backed up with data.

Dr. J. A. Mann, PhD
Williamsburg, VA
October 30,2004




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