Sunday :: Aug 8, 2004

Economy: a view from the right

by soccerdad

I have been concerned about the long term outlook for the economy for some time now primarily due to the deficits. My anxiety has gone up another notch because we are now getting warning from the conservative right normally aligned with Bush.

John Makin is a resident scholar at the American Enterprise Institute, a Washington conservative think tank. He's worried about stagflation. I found a number of definitions of stagflation, but it usually is an increase in prices (inflation) with an unresponsive economy (stagnant), low job demand etc.

"A whiff of stagflation is in the air," and the negative impact on corporate earnings and stock prices "could be ugly,"

"Waning demand growth, falling productivity growth, and China's great reservoir of raw labor make sustained U.S. employment growth unlikely as we move into the second half of 2004," Makin said.

And there's more bad news in store, according to Makin -- a 3 percent inflation rate.

The stimulant for inflation worries is the price of oil. The Middle east is pumping close to capacity, the instability of supply due to terrorist activities, and limited refining capacity here will all put pressure towards maintaining increased prices. These oil prices will then spread throughout the economy. He maintains that it won't be the violent stagflation of the 70's, but a creeping stagflation.

Makin also claims that Greenspan is misleading investors by his predictions. The assumptions underlying Greenspan's predictions are overly optimistic according to Makin. For example, The Central Bank assumes that the economy will grow at a rate of 4.5-4.75% and their indicator of inflation is predicted to go up 1.75-2.0%. A scenario Makin calls "pollyanna-ish."

However, Makin's views appear to put him in the minority. Part of the disagreement appears to be over definitions. Some people say the stagflation is accompanied by much higher rates of inflation. People also point to high corporate earnings as a good sign for the economy.

soccerdad :: 3:59 PM :: Comments (1) :: Digg It!