Friday, July 4, 2008

Who is to Blame for the Bad Economy? Part 1 of Response to "In Just One Year"

There is an anonymous email circulating on the internet called "In Just One Year." It's a lengthy email and makes a lot of claims, most of which try to blame our bad economy on democrats or immigrants.

Part 1 of the email claims that, since the democrats took control of Congress in 2006, consumer confidence and equity values are down, the price of gasoline and the unemployment rate are up, and 1% of American homes are in foreclosure. The implication is that democrats caused all these things to happen.

Before I respond to the specific claims I think a couple things should be said.

  • Anonymous emails should arouse suspicion. We don't know who the author is or what their agenda is and we have no opportunity to investigate or question them.
  • Just because things happen at the same time, does not mean there is a causal relationship. George W. Bush assumed office in 2001. In less than one year, terrorists attacked the United States. That doesn't mean George Bush's election caused a terrorist attack.
  • Part I of the email I am responding to does not provide sources for the statistics cited, nor does it provide the dates that the author is comparing. That means it is impossible to verify the actual figures.
Now lets get to the specific claims in the email.

Consumer Confidence Drop

The Consumer Confidence Survey is published monthly by The Conference Board. For a good explanation of how it works, you can check out the entry on Wikipedia. The author of the email I am responding to claims that consumer confidence was at a 2 1/2 year high and then plummeted after democrats took office.

They do not say what specific policies they think caused the decline in consumer confidence. With barely a majority - certainly not enough of a majority to override presidential vetoes on major, partisan economic issues - the democratic congress hasn't done much good or bad. Presumably, the author wants us to believe that the democratic politicians mere presence in Washington caused the economy to collapse.

There are many charts and graphs showing consumer confidence over time and most of them show the same basic thing. Consumer confidence dropped precipitously in 2001. There have been some increases since, but we have never returned to our pre-2001 levels.

A graph from ABC News and the Washington Post, which you can see here, shows consumer confidence throughout Bush's presidency. The chart shows that the decline in consumer confidence corresponds with Bush's presidency, but it does not prove that Bush's presidency caused the decline. I think most reasonable, logical people could agree that the turning point in consumer confidence was the terrorist attacks in 2001.

Many people (including me) believe that poor governance and leadership since 2001 (by the president and congress) has exacerbated our economic problems, but the authors insinuation that democrats have caused the decline in consumer confidence is demonstrably false.

Equity Value Decline and Home Foreclosures

The email references two different declines in equity value, a decline in the value of investments and a decline in the value of homes. Let's begin with the decline in investment equity. Investment equity generally refers to the stock market.Without knowing what dates the author is referring to, it is impossible to confirm that a stock market loss occurred, but let's assume that there was a loss.

The stock market is volatile and risky. It fluctuates wildly and always has. The fluctuations are often random and illogical. The largest one day drop in the Dow Jones Industrial Average happened in 1987 (during a republican administration). Economists still haven't nailed down the cause of the 87' crash. For a list of possible culprits and an idea of how difficult it is to assign blame for these things, see this article from the History News Network. All of which is to say that there is no way the author of that email can assign blame to congress or anyone else.

In order to understand the decline in home equity, you must first understand the housing bubble. There is a great article in the Washington Post which follows the trajectory of all the housing market changes leading up to our current situation. In 1970 (during the Nixon administration) the government decided to buy mortgages from small savings and loans and sell them as bundled investments (bonds). This increased the amount of capital available for home loans, but also increased the amount of risk and speculation around the loans.

In the 1980s, Wall Street came up with all sorts of clever and complicated ways to slice and dice these mortgage investments so that they could make larger and larger profits. Since the rules changed there have been several boom and bust cycles for the stock market - highs followed by the 1987 crash, the boom followed by the bust, and September 11th. All of these booms and busts caused reactions in the housing market.

After September 11th, the Bush administration pushed through tax cuts and the Federal Reserve cut interest rates. Low interest rates and more cash encouraged even more building, particularly in boom areas like California and Florida. Where did that leave us? We've had 30 - 40 years of rapidly increasing capital available for home loans, sold to investors using absurdly complicated value formulas. We have a post attack precarious economy, rising fuel prices, home builders on a spree, and stagnant or decreasing income for your average person.

The builders had to find people to buy all the homes they were building. Because many people could not qualify for traditional loans (because of bad credit or low income), they were provided with "subprime" loans. These people paid higher interest. Often their mortgage rate would rise over time or they would have large balloon payments. (I should note that a significant lowering of mortgage standards began under the Clinton administration and you can read about it here.)

Inevitably, when balloon payments came due and monthly mortgage prices were set to go up, people began to default on their loans. Anyone paying attention could have predicted that this housing boom couldn't last forever. In fact, people had been predicting this balloon to pop since way before the dems took over congress. You can check out another Business Week article predicting a drop from back in 2005.

Unemployment Rate Increase

Another accusation made in the email is that the unemployment rate has risen since the dems took office. Again, the author did not provide comparison dates. And again I think it would be prudent to look at a longer period of time.

The unemployment rate is tracked by the U.S. Department of Labor Statistics. They calculate the rate based on monthly interviews they perform. A chart showing the rates from 1970 to present can be seen here. As you can see from the chart, our highest unemployment rates were actually during the Reagan administration - 9.7% in 1982. By the end of Reagan's second term, it had dropped to 5.3% (just about where it is right now). It rose again somewhat at the end of Bush Srs. term and the beginning of Clinton's. By the end of Clinton's term, it was the lowest it had been in the years shown on the chart. The highest unemployment since Bush took office was in 2003 (when the republicans still had control of congress). In short, trying to blame a slight increase in unemployment on the democratic congress is absurd.

The final issue raised in part I of the email is rising gas prices. Since this is the area I believe has the most significance, and since this post is already a bit lengthy, I'm going to respond to that in a separate post.

To be continued...

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