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
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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