Snippets:

(1) Guess who:

Guess who said the following words:

"So for the first time, European ministers should together embrace flexibility for labor markets, liberalization in capital and product markets, and tax competition in place of tax harmonization -- in truth, a new growth agenda for Europe. Most of all we should recognize that it is only by encouraging enterprise -- and rewarding it properly -- that we will create the growth, productivity and employment we need.

"Because just 5% of Americans out of work experience unemployment for more than a year -- in contract to 50% of Germany’s, 30% in France, and 60% in Italy -- we should reject any new directives that damage employment and growth.

"Europe should look at new incentives to make work pay, such as the U.S.’s earned income tax credit.

"We must regulate only where necessary and deregulate where possible. Every proposed regulation should be put to the costs test, then the jobs test and then the "is it really necessary" text. Existing regulations should be put to the same test."

These words were not said by Ronald Reagan, nor by George W. Bush, nor by Treasury Secretary John Snow. In short, they were not from any conservative Republican trying to preach free market capitalism to the Europeans. They were from none other than the chancellor of the exchequer of Britain’s Labor government, Gordon Brown.

Empirical evidence and observations must have led Mr. Gordon Brown to these conclusions. No matter who is in office, his economic policies need to be guided by empirical evidence, not his ideology.

Do we want Capitalism or Socialism? If we want Capitalism, then, President Bush’s economic team has already engineered a recovery along the lines that Mr. Gordon Brown would like his European colleagues to emulate.

Indeed, most economists now believe GDP growth will strengthen markedly in the second half of 2003 and beyond because of the Bush tax cuts and the Federal Reserve’s accommodative monetary policy.

(2) The nay sayers:

But don’t expect everyone to agree with Mr. Gordon Brown or the Bush economic team. There are quite a few nay sayers out there. For example, now we’ve got ten Democratic presidential contenders who are all very, very pessimistic about America’s economic outlook.

Despite recent media reports predicting strong GDP growth in the coming quarters, these nay sayers want the public to believe that the U.S. economy is falling into a "quagmire". If they really believe that’s where the economy is heading, they should at least bet part of their life’s savings on short equity positions as a sign of commitment to their pessimistic convictions.

One of the Democratic presidential contenders, Gen. Wesley Clark, asks why America has lost 2.7 million jobs since Bush took office in January of 2001. His answer to his own question is: It is all because of the federal budget deficits that have emerged with the Bush administration’s policies.

It would be gracious of the general, if he could tell us what economic textbooks he has read attribute job losses to federal budget deficits. A recent survey shows mainstream economists believe the opposite is true.

In blaming job losses entirely on federal budget deficits, Gen. Clark seems to believe that the bursting of the late 1990s economic bubble didn’t cause job losses, that 9/11 didn’t cause job losses, that the decreases in air travel volumes under the threat of global terrorism didn’t cause job losses, that corporate malfeasance which came into full swing in the late 1990s but was exposed last year didn’t cause job losses, that the inevitable cyclical economic downturn didn’t cause job losses, that cheap imports from China didn’t cause job losses...

(3) The late 1990s economic bubble:

In the late 1990s, America’s unemployment rate fell to about 4%. On the surface, that was wonderful. Yet beneath the surface, something unsustainable was happening -- a bubble built on exaggerated demand growth estimates.

For example, infrastructure investment projects in the telecommunications industry were based on exaggerated telecom service demand growth estimates. As telecom service providers expanded on exaggerated demand growth estimates, they hired extra workers and ordered extra telecom equipment. To fill those orders, telecom equipment makers expanded their plants and hired extra workers. In other words, many jobs were created because of exaggerated demand growth estimates.

In retrospect, it was a mirage. Those jobs spurred into existence by exaggerated growth estimates should not have come into existence in the first place. They were unsustainable bubble jobs created by unsustainable bubble projects which were launched by exaggerated bubble estimates. When the bubble burst in spring of 2000, those unsustainable bubble jobs had to disappear.

America’s natural unemployment rate may be around 5%. People change jobs all the time, and between jobs they stay unemployed for a period of time. So there are always a certain number of people in such a transitional state. At present, the jobless rate is about 6.1% -- way below Germany’s unemployment rate of 10.4%, France’s 9%, and Canada’s 8%.

Politicians who promise to "bring back those 3 million jobs lost since Bush took office" may have to re-create the same kind of bogus bubble conditions of the late 1990s to achieve that target. But the same tricks are unlikely to fool investors again, without whose money, few jobs can be created.

Sincerely,

Robert M. Liu