On Finances, USA STYLE

July 18, 2005
The Dropout Puzzle
By PAUL KRUGMAN
Many seemingly authoritative figures, not all of them partisan shills, say that the American economy has fully recovered from the recession that began in 2001. They point to the unemployment rate, which has fallen from a peak of 6.3 percent in 2003 to 5 percent last month. That's not quite as low as the 4.2 percent unemployment rate in February 2001, when the recession began, but it's fairly low by historical standards.

For some reason, however, the public isn't feeling prosperous. Gallup tells us that only 3 percent of Americans describe the economy as "excellent," and only 33 percent describe it as "good."

Maybe people are just ungrateful. Maybe they've been misled by negative media reports. Maybe they're grumpy about their paychecks: adjusted for inflation, average weekly earnings have been flat for the past five years.

Or maybe the figures on unemployment are giving a false signal.

Economists who argue that there's something wrong with the unemployment numbers are buzzing about a new study by Katharine Bradbury, an economist at the Federal Reserve Bank of Boston, which suggests that millions of Americans who should be in the labor force aren't. "The addition of these hypothetical participants," she writes, "would raise the unemployment rate by one to three-plus percentage points."

Some background: the unemployment rate is only one of several numbers economists use to assess the jobs picture. When the economy is generating an abundance of jobs, economists expect to see strong growth in the payrolls reported by employers and in the number of people who say they have jobs, together with a rise in the length of the average workweek. They also expect to see wage gains well in excess of inflation, as employers compete to attract workers.

In fact, we see none of these things. As Berkeley's J. Bradford DeLong writes on his influential economics blog, "We have four of five indicators telling us that the state of the job market is not that good and only one - the unemployment rate - reading green."

In particular, even the most favorable measures show that employment growth has lagged well behind population growth over the past four years. Yet the measured unemployment rate isn't much higher than it was in early 2001. How is that possible?

The answer, according to the survey used to estimate the unemployment rate, is a decline in labor force participation. Nonworking Americans aren't considered unemployed unless they are actively looking for work, and hence counted as part of the labor force. And a large number of people have, for some reason, dropped out of the official labor force.

Those with a downbeat view of the jobs picture argue that the low reported unemployment rate is a statistical illusion, that there are millions of Americans who would be looking for jobs if more jobs were available. Those with an upbeat view argue that labor force participation has fallen for reasons that have nothing to do with job availability - for example, young adults, recognizing the importance of education, may have chosen to stay in school longer.

That's where Dr. Bradbury's study comes in. She shows that the upbeat view doesn't hold up in the face of a careful examination of the numbers. In fact, because older Americans, especially older women, are more likely to work than in the past, labor force participation should have risen, not fallen, over the past four years. As a result, she suggests that there may be "considerable slack in the U.S. labor market": there are at least 1.6 million and possibly as many as 5.1 million people who aren't counted as unemployed but would take jobs if they were available.

There's both good news and bad news in that assessment. The good news is that the economy probably has plenty of room to expand before inflation becomes a problem (which implies that the Fed's decision to start raising interest rates was premature).

The bad news is that it's hard to see where further expansion will come from. We've already had four years of extremely loose fiscal and monetary policy. Tax cuts have pushed the federal budget deep into the red. Low interest rates have helped generate a housing bubble that has lifted real estate prices to ludicrous heights in major parts of the country.

If all that wasn't enough to give us a full economic recovery, what will?

E-mail: krugman@nytimes.com



Copyright 2005 The New York Times Company

July 18, 2005
America's Truth Deficit
By WILLIAM GREIDER
Washington

DURING the cold war, as the Soviet economic system slowly unraveled, internal reform was impossible because highly placed officials who recognized the systemic disorders could not talk about them honestly. The United States is now in an equivalent predicament. Its weakening position in the global trading system is obvious and ominous, yet leaders in politics, business, finance and the news media are not willing to discuss candidly what is happening and why. Instead, they recycle the usual bromides about the benefits of free trade and assurances that everything will work out for the best.

Much like Soviet leaders, the American establishment is enthralled by utopian convictions - the market orthodoxy of free trade globalization. The United States is heading for yet another record trade deficit in 2005, possibly 25 percent larger than last year's. Our economy's international debt position - accumulated from many years of tolerating larger and larger trade deficits - began compounding ferociously in the last five years. Our net foreign indebtedness is now more than 25 percent of gross domestic product and at the current pace will reach 50 percent in four or five years .

For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public? The authorities assure us timely policy adjustments will fix the matter.

Reporters and editors typically take cues from the same influential sources and learned experts in business, finance and government. If the news media decided to cast these facts as the story of the world's only superpower losing ground in global competition and becoming financially dependent on strategic rivals like China, the public would take greater notice. But governing elites would regard such clarity as inflammatory. America's awesome trade problem is instead portrayed as something else - an esoteric technical dispute about currency values, the dollar versus the Chinese yuan. The context is guaranteed to baffle and benumb citizens.

The possibility that the United States can no longer afford globalization, at least not as it now functions, is what opinion leaders do not wish to discuss. A few brave dissenters have stated the matter plainly and called for significant policy shifts to stop the hemorrhaging. Warren Buffett, the legendary investor, says the United States is destined to become not an "ownership society," but a "sharecropper society." But his analysis, and others like it, are brushed aside.

An authentic debate might start by asking heretical questions: Why is the United States one of the few advanced economies that suffers from perennial trade deficits? Why do new trade agreements, despite official promises, always leave the United States with a deeper deficit hole, with another wave of jobs moving overseas? How do the authorities explain the 30-year stagnation of working-class wages that is peculiar to America? Are we supposed to believe that everyone else is simply more competitive or slyly breaking the rules? In the last three decades, American policymakers have succeeded in closing the trade gap with only one event - a recession.

The American predicament is shaped by operating dynamics grounded in the global system, singularly embraced by Washington because Washington originated most of them. At the outset, these practices were both virtuous and self-interested for the United States - encouraging industrialization in poor countries, binding cold war allies together with trade and investment, furthering the global advance of American business and finance. With its wide-open market, America played - and still plays - buyer of last resort for world exports. Its leading companies and banks gained access to developing new markets, often by sharing jobs, production and technology with others. American policymakers also got to run the world.

The utopian expectations behind this arrangement turned out to be wrong, judging by empirical evidence rather than theory. But why wrong? American political debate is enveloped by the ideology of free trade, but "free trade" does not actually describe the global economic system. A more accurate description would be "managed trade" - a dense web of bargaining and deal-making among governments and multinational corporations, all with self-interested objectives that the marketplace doesn't determine or deliver. Every sovereign nation, the United States included, uses its vast arsenal of policies to pursue its national interest.

But on the crucial question of how policy makers define "national interest," Washington stands alone. Western Europe, whatever its problems, manages economic policy to maintain modest trade surpluses. Japan manages to insure far larger surpluses in recessions (its export income subsidizes inefficient domestic employers). China strives to acquire a larger, more advanced industrial base at the expense of worker incomes and bank profits. Germany and Japan, despite vast differences, both manage to keep advanced manufacturing sectors anchored at home and to defend domestic wage levels and social guarantees. When they do disperse production and jobs overseas, as they must, they do so strategically.

By contrast, Washington defines "national interest" primarily in terms of advancing the global reach of our multinational enterprises. Elites are persuaded by the reigning orthodoxy that subsidiary domestic interests will ultimately benefit too. The distinctive power of America's globalized companies is reflected in trade patterns. Nearly half of American exports and imports are not traded in open markets - the price auction idealized by neoclassical economics - but within the companies themselves, moving materials and components back and forth among their far-flung factories. A trade deficit does not show on the company's balance sheet, only on the nation's. In recent years, much of the trade deficit has reflected the value-added production and jobs that companies moved elsewhere.

The United States is thus especially vulnerable to the downward pressures on working-class wages that exist on both ends of the global system. American producers are generally free - and even encouraged by Washington - to shift production to low-wage locations. Companies regularly use this cost-cutting technique as a competitive weapon without regard to the domestic consequences. The practice works for companies and investors, but not so well for a nation.

INDEED, the cumulative effects of retarding labor incomes worldwide repeatedly threatens stagnation or worse for the entire system. Workers, to put it crudely, cannot buy what the world can make. Too much capital leads to the speculative "bubbles" that bounce around the world, visiting financial crisis on rich and poor alike.

At a different moment in history, American leadership might have stepped up to these disorders and led the way to solutions. If globalization is to continue without encountering more crisis and random destruction, governments must together shift the balance of power so labor incomes can rise in step with rising productivity and profits. If the United States is to avert its own reckoning, it must take decisive action to draw firm limits on its exposure to trade deficits, that is, resign its position as the open-armed buyer of last resort. In effect, Washington would also reform its own national interest imperatives so that they more closely resemble what other nations already embrace. Ultimately, American remedial action may protect the global system from its own crisis - the moment when trading partners discover they have just lost their best customer.

But to describe plausible remedies is to explain why none are likely. The webs of mutual interests connecting government, corporate boardrooms and Wall Street are too deeply woven, as are habits of thought among policy makers and politicians. So I do not expect anything fundamental will be altered in time. We are going to find out if the dissenters are right.

William Greider, the national affairs columnist of The Nation, is the author of "One World, Ready or Not."



Copyright 2005 The New York Times Company

July 17, 2005
Follow the Uranium
By FRANK RICH
"I am saying that if anyone was involved in that type of activity which I referred to, they would not be working here."
- Ron Ziegler, press secretary to Richard Nixon, defending the presidential aide Dwight Chapin on Oct. 18, 1972. Chapin was convicted in April 1974 of perjury in connection with his relationship to the political saboteur Donald Segretti.

"Any individual who works here at the White House has the confidence of the president. They wouldn't be working here at the White House if they didn't have the president's confidence."
- Scott McClellan, press secretary to George W. Bush, defending Karl Rove on Tuesday.

WELL, of course, Karl Rove did it. He may not have violated the Intelligence Identities Protection Act of 1982, with its high threshold of criminality for outing a covert agent, but there's no doubt he trashed Joseph Wilson and Valerie Plame. We know this not only because of Matt Cooper's e-mail, but also because of Mr. Rove's own history. Trashing is in his nature, and bad things happen, usually through under-the-radar whispers, to decent people (and their wives) who get in his way. In the 2000 South Carolina primary, John McCain's wife, Cindy, was rumored to be a drug addict (and Senator McCain was rumored to be mentally unstable). In the 1994 Texas governor's race, Ann Richards found herself rumored to be a lesbian. The implication that Mr. Wilson was a John Kerry-ish girlie man beholden to his wife for his meal ticket is of a thematic piece with previous mud splattered on Rove political adversaries. The difference is that this time Mr. Rove got caught.

Even so, we shouldn't get hung up on him - or on most of the other supposed leading figures in this scandal thus far. Not Matt Cooper or Judy Miller or the Wilsons or the bad guy everyone loves to hate, the former CNN star Robert Novak. This scandal is not about them in the end, any more than Watergate was about Dwight Chapin and Donald Segretti or Woodward and Bernstein. It is about the president of the United States. It is about a plot that was hatched at the top of the administration and in which everyone else, Mr. Rove included, are at most secondary players.

To see the main plot, you must sweep away the subplots, starting with the Cooper e-mail. It has been brandished as a smoking gun by Bush bashers and as exculpatory evidence by Bush backers (Mr. Rove, you see, was just trying to ensure that Time had its facts straight). But no one knows what this e-mail means unless it's set against the avalanche of other evidence, most of it secret, including what Mr. Rove said in three appearances before the grand jury. Therein lies the rub, or at least whatever case might be made for perjury.

Another bogus subplot, long popular on the left, has it that Patrick Fitzgerald, the special prosecutor, gave Mr. Novak a free pass out of ideological comradeship. But Mr. Fitzgerald, both young (44) and ambitious, has no record of Starr- or Ashcroft-style partisanship (his contempt for the press notwithstanding) or known proclivity for committing career suicide. What's most likely is that Mr. Novak, more of a common coward than the prince of darkness he fashions himself to be, found a way to spill some beans and avoid Judy Miller's fate. That the investigation has dragged on so long anyway is another indication of the expanded reach of the prosecutorial web.

Apparently this is finally beginning to dawn on Mr. Bush's fiercest defenders and on Mr. Bush himself. Hence, last week's erection of the stonewall manned by the almost poignantly clownish Mr. McClellan, who abruptly rendered inoperative his previous statements that any suspicions about Mr. Rove are "totally ridiculous." The morning after Mr. McClellan went mano a mano with his tormentors in the White House press room - "We've secretly replaced the White House press corps with actual reporters," observed Jon Stewart - the ardently pro-Bush New York Post ran only five paragraphs of a wire-service story on Page 12. That conspicuous burial of what was front-page news beyond Murdochland speaks loudly about the rising anxiety on the right. Since then, White House surrogates have been desperately babbling talking points attacking Joseph Wilson as a partisan and a liar.

These attacks, too, are red herrings. Let me reiterate: This case is not about Joseph Wilson. He is, in Alfred Hitchcock's parlance, a MacGuffin, which, to quote the Oxford English Dictionary, is "a particular event, object, factor, etc., initially presented as being of great significance to the story, but often having little actual importance for the plot as it develops." Mr. Wilson, his mission to Niger to check out Saddam's supposed attempts to secure uranium that might be used in nuclear weapons and even his wife's outing have as much to do with the real story here as Janet Leigh's theft of office cash has to do with the mayhem that ensues at the Bates Motel in "Psycho."

This case is about Iraq, not Niger. The real victims are the American people, not the Wilsons. The real culprit - the big enchilada, to borrow a 1973 John Ehrlichman phrase from the Nixon tapes - is not Mr. Rove but the gang that sent American sons and daughters to war on trumped-up grounds and in so doing diverted finite resources, human and otherwise, from fighting the terrorists who attacked us on 9/11. That's why the stakes are so high: this scandal is about the unmasking of an ill-conceived war, not the unmasking of a C.I.A. operative who posed for Vanity Fair.

So put aside Mr. Wilson's February 2002 trip to Africa. The plot that matters starts a month later, in March, and its omniscient author is Dick Cheney. It was Mr. Cheney (on CNN) who planted the idea that Saddam was "actively pursuing nuclear weapons at this time." The vice president went on to repeat this charge in May on "Meet the Press," in three speeches in August and on "Meet the Press" yet again in September. Along the way the frightening word "uranium" was thrown into the mix.

By September the president was bandying about the u-word too at the United Nations and elsewhere, speaking of how Saddam needed only a softball-size helping of uranium to wreak Armageddon on America. But hardly had Mr. Bush done so than, offstage, out of view of us civilian spectators, the whole premise of this propaganda campaign was being challenged by forces with more official weight than Joseph Wilson. In October, the National Intelligence Estimate, distributed to Congress as it deliberated authorizing war, included the State Department's caveat that "claims of Iraqi pursuit of natural uranium in Africa," made public in a British dossier, were "highly dubious." A C.I.A. assessment, sent to the White House that month, determined that "the evidence is weak" and "the Africa story is overblown."

AS if this weren't enough, a State Department intelligence analyst questioned the legitimacy of some mysterious documents that had surfaced in Italy that fall and were supposed proof of the Iraq-Niger uranium transaction. In fact, they were blatant forgeries. When Mohamed ElBaradei, the director general of the International Atomic Energy Agency, said as much publicly in the days just before "shock and awe," his announcement made none of the three evening newscasts. The administration's apocalyptic uranium rhetoric, sprinkled with mushroom clouds, had been hammered incessantly for more than five months by then - not merely in the State of the Union address - and could not be dislodged. As scenarios go, this one was about as subtle as "Independence Day" and just as unstoppable a crowd-pleaser.

Once we were locked into the war, and no W.M.D.'s could be found, the original plot line was dropped with an alacrity that recalled the "Never mind!" with which Gilda Radner's Emily Litella used to end her misinformed Weekend Update commentaries on "Saturday Night Live." The administration began its dog-ate-my-homework cover-up, asserting that the various warning signs about the uranium claims were lost "in the bowels" of the bureaucracy or that it was all the C.I.A.'s fault or that it didn't matter anyway, because there were new, retroactive rationales to justify the war. But the administration knows how guilty it is. That's why it has so quickly trashed any insider who contradicts its story line about how we got to Iraq, starting with the former Treasury secretary Paul O'Neill and the former counterterrorism czar Richard Clarke.

Next to White House courtiers of their rank, Mr. Wilson is at most a Rosencrantz or Guildenstern. The brief against the administration's drumbeat for war would be just as damning if he'd never gone to Africa. But by overreacting in panic to his single Op-Ed piece of two years ago, the White House has opened a Pandora's box it can't slam shut. Seasoned audiences of presidential scandal know that there's only one certainty ahead: the timing of a Karl Rove resignation. As always in this genre, the knight takes the fall at exactly that moment when it's essential to protect the king.



Copyright 2005 The New York Times Company