One week ago, we were being told that Congress absolutely needed to make a debt ceiling deal to prevent economic calamity, beginning with the stock market. President Obama signed that debt deal into law one week ago.
On Thursday, the Dow Jones Industrial Average dropped 512 points, or 4.3 percent, in its worst day since 2008, erasing all the gains of the entire year. The S&P 500 dropped 60 points, or 4.8 percent, and Nasdaq did even worse, losing 136 points, or 5.1 percent.
But Thursday looked good compared to Monday, when the DJIA dumped another 634.76 points, or 5.5 percent, the S&P 500 lost 79.92 points, or 6.66 percent, and Nasdaq dropped 174.72 points, or 6.9 percent, erasing Thursday for the Worst Day of the Market Year title. The DJIA now has lost 14 percent in two weeks.
This came after Standard & Poor’s downgraded U.S. long term debt from AAA to AA+. CNNMoney reports:
Market observers tried to say the downgrade by itself shouldn’t matter — that it was expected and that the United States still has a strong credit rating.
But the market wasn’t buying it. …
Even if investors dismissed the downgrade, they’d still have to contend with the European debt crisis and rising fears of a new U.S. recession.
And what do you suppose will happen today after this news gets wider reporting:
The White House and much of the chattering class cooed on Friday when unemployment dropped to 9.1 percent and 117,000 jobs were reportedly created in July. But these numbers, upon closer inspection, show no progress on the jobs front.
Buried in the job stats was a number — 193,000 — that dwarfed all the rest. That is the number of workers who left the job market. If 193,000 left and only 117,000 jobs were added, we lost 76,000 jobs. Moreover, this is not an aberration.
When President Obama took office in January of 2009, the labor participation rate was 65.7 percent. Now, “The labor force participation rate is currently 63.9 percent. That is the lowest level since 1984,” says Matt McDonald, a communications and business strategist who previously worked in the Bush administration. “If the labor force participation rate today were 65.7 percent, there would be an additional 4.2 million people in the workforce.” In that case, the unemployment rate would be 11.5 percent not 9.1 percent.
The Wall Street Journal added both perspective and irony Monday, before the latest market tank:
Investors and markets—not any single company’s rating—are the ultimate judge of a nation’s creditworthiness. And after their performance in fanning the credit and mortgage-security mania of the last decade, S&P, Moody’s and Fitch should hardly be seen as peerless oracles.
Their views are best understood as financial opinions, like newspaper editorials, and they’re only considered more important because U.S. government agencies have required purchasers of securities to use their ratings. We’ve fought to break that protected oligopoly, even as liberals in the Senate led by Minnesota’s Al Franken have tried to preserve it. …
Yet is there anything that S&P said on Friday that everyone else doesn’t already know? S&P essentially declared that on present trend the U.S. debt burden is unsustainable, and that the American political system seems unable to reverse that trend.
This is not news.
In that context, the Obama Administration’s attempt to discredit S&P only makes the U.S. look worse—like the Europeans who also want to blame the raters for noticing the obvious. …
The real reason for White House fury at S&P is that it realizes how symbolically damaging this downgrade is to President Obama’s economic record. Democrats can rail all they want about the tea party, but Republicans have controlled the House for a mere seven months. The entire GOP emphasis in those seven months—backed by the tea party—has been on reversing the historic spending damage of Mr. Obama’s first two years.
The Bush Presidency and previous GOP Congresses contributed to the current problem by not insisting on domestic cuts to finance the cost of war, and by adding the prescription drug benefit without reforming Medicare. But as recently as 2008 spending was still only 20.7%, and debt held by the public was only 40.3%, of GDP.
In the name of saving the economy from panic, the White House and the Pelosi Congress then blew out the American government balance sheet. They compounded the problem of excessive private debt by adding unsustainable public debt.
No reputable financial advisor would tell stockholders to panic and sell after one bad market day. The market tanked on Black Monday 1987, losing 22.61 percent of its value in one day, forcing President Ronald Reagan to give an unscheduled address to tell the American people that the economy’s fundamentals were still strong. And indeed, within a year the market gained back everything it had lost.
Anyone out there think the economy’s fundamentals are strong?
I agree with four-fifths of Harvard University Prof. Robert Barro‘s ways to get back the AAA bond rating?
The way for the U.S. government to earn back a AAA rating is to enact a meaningful medium- and long-term plan for addressing the nation’s fiscal problems. I have sketched a five-point plan that builds on ideas from the excellent 2010 report of the president’s deficit commission.
First, make structural reforms to the main entitlement programs, starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula. Second, lower the structure of marginal tax rates in the individual income tax. Third, in the spirit of Reagan’s 1986 tax reform, pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits—not to mention eliminating ethanol subsidies. Fourth, permanently eliminate corporate and estate taxes, levies that are inefficient and raise little money.
Fifth, introduce a broad-based expenditure tax, such as a value-added tax (VAT), with a rate around 10%. The VAT’s appeal to liberals can be enhanced, with some loss of economic efficiency, by exempting items such as food and housing.
I recognize that a VAT is anathema to many conservatives because it gives the government an added claim on revenues. My defense is that a VAT makes sense as part of a larger package that includes the other four points.
Introducing a new tax is a terrible idea unless it replaces another tax in its entirety. (Eliminating corporate and estate taxes without eliminating the 16th Amendment guarantees that at some future point we will have both high income taxes and high VAT taxes.) But lower and simpler taxes worked to propel the economy through the 1980s so well that even Bill Clinton’s 1993 tax increases didn’t stall the economy, and the post-Gulf War recession wasn’t noticeable to most people.
This recession and this lack of economic growth is noticeable to most people. It may soon be noticeable to the Obama reelection campaign, says the University of Virginia Center for Politics:
In November 2012, voters will probably be focused on the moribund economy, not the debt. Almost lost in the shuffle of the last week’s real or manufactured crisis was the sobering news that the United States’ gross domestic product grew only at a paltry 1.3% clip in the second quarter. The first quarter was downgraded to a truly miserable 0.4% growth rate. President Obama needs that number to be close to 3%, if not higher, to achieve a comfortable reelection. If the economy doesn’t pick up soon, Obama’s once-bright prospects for reelection could be history, along with his White House tenure—assuming, of course, Republicans nominate a mainstream candidate that can appeal to swing voters and appears to be a credible possible occupant of the Oval Office.
Steve Prestegard.com: The Presteblog 