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Going Down With the Dow | The Nation

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Going Down With the Dow

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It’s panic time on Wall Street, with the S&P dropping 4 percent on Thursday and more than 11 percent over the past two weeks. Apparently traders were not too impressed by the deal between the White House and Congress on raising the debt ceiling.

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Dean Baker
Dean Baker, co-director of the Center for Economic and Policy Research, is the author of False Prophets: Recovering...

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Dire warnings about the deficit don’t add up mathematically. But then, Fix the Debt is not really about the economy, it’s about gutting Medicare, Social Security and other social programs.

The median income of people over age 65 is less than $20,000. The solution is not to cut that further.

Of course, the most obvious explanation for the plunge is the prospect of a collapse of the euro. The debt problems hitting Ireland and Greece have spread to two of the four eurozone giants, Italy and Spain. The prudes at the European Central Bank are going to have to relearn economics very quickly—their cult of 2 percent inflation is bringing down the house. They have come to the point where they have to choose between abandoning the cult or ending the euro. Naturally the prospect of the dissolution of one of the world’s two main currencies is going to unnerve the markets.

The other big factor depressing stock markets is a set of weak economic reports that indicate the US economy is barely growing. The most important of these reports was the second-quarter GDP numbers, which showed the economy growing at just a 1.3 percent rate. This was coupled with a sharp revision to first-quarter data that showed growth of just 0.3 percent. This growth is far too slow to keep pace with the growth of the labor force.

While the July jobs report showed a small uptick in employment, growth over the past three months has averaged just 72,000. This is 20,000 less than what is needed just to keep pace with the growth of the labor force. At this pace, we will never make up the 8 million jobs lost in the recession.

The big debt-ceiling agreement promises to depress this growth even further. The proposed cuts to government spending effectively amounts to taking away water in the middle of a jobs drought. Good job, Washington!

Those still believing in the virtues of government austerity also got a big kick in the face last week. Britain had its third consecutive quarter of near zero growth—the apparent fruits of the austerity path put in place by the Conservative/Liberal Democrat coalition government.

It’s worth putting in a couple of calming notes. First, the stock market is not the economy. As Paul Samuelson famously quipped, the market has predicted nine of the last five recessions. The people who invest in the market are the same geniuses who thought Countrywide and Pets.com had great business models. There is no reason to think the markets are any wiser today than they were when they thought everything was just great in 2007.

Second, the folks warning about a double-dip recession seem to have forgotten how we usually get recessions. The standard recession is associated with a collapse in house and car sales. The good news is that both sectors are still so badly depressed that there’s not much further down they can go. In other words, it is unlikely we will see the negative growth associated with a recession.

On the other hand, many quarters of very slow positive growth is really no better. This is most likely what the economy faces, barring some serious change in policy in Washington. So the double-dippers might be too pessimistic, but not by much. 

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