OK for Bob, BJ, and anyone else interested.
The problems are two fold IMO. First the tax cuts were stupid. You can't give money to the upper classes in a recesion, and expect it to flow through the economy, as it would while ideal conditions exsist. What happens is instead of being consumed, the money goes to making up for lost profits and wages. It is in effect wasted because it isn't going to new spending, it is being added to the bottom lines of companies to dress up bad profit numbers, and it is going to cover old debts that were started while people where making more money. Money used to cover debts actually has a negative affect on economy because that disappears from circulation. Now that the economic cycle has turned on its own, once wages start to recover growth will occur. But because tax rates were cut, not only is there growth, but there is more money out there because of the tax cuts. So instead of controlled growth, the money supply basically has had a multiplier of growth plus the extra of the tax cut.
#2 is Key commodity prices. If you look at basically a cross section of prices you would find that many many prices instead of falling correspondingly with the economic downturn actually went up. For example take a look at the charts of gold, silver, gas prices, and cattle. All of these are at very high levels. Now once demand turns around as people get hired and companies expand, prices are going to keep going up, as all of this extra money (growth plus tax cut) starts to tear through the system. Plus as an added bonus, is all of this WTO talk. 21 nations organized in protest of the EU and US amoungst others subsidizing their farmers to the point of bankrupting the 3rd world farmer. The US alone gives out approx $6 billion a year to keep things like corn, wheat, beans, and cotton at historically low levels. Now these 21 nations are demanding that we drop our barriors, in order for them to drop their barriors in other markets. Estimates were that if dropped there would be about a 25% jump in most of these commodities as unprofitable farms went out of business, and were replaced by either forgein competition or just simply had that production disappear. Put these together and you have huge price increases in food, transporation, precious metals, and just about everything connected to these staples.
The war on terrorism has been a huge problem, as have all of the other wars that we are now involved in. What they have done is cause deficit spending, which means the government is out borrowing $1/2 trillion making it much harder for anyone else to borrow money, which means the price of money (interest rates) goes up also. It also causes economice resources to get reallocated to much less profitable ventures (what is the economic return of a $1 million cruise missle exploding vs a million dollar expansion of a local factory)
Consumer confidence actually remained incredibly strong after 9-11, actually confidence numbers broke when lay offs started en masse. And yes we were heading for recession way before 9-11. This was a result of the mismanagement of the bubble from the irrational stock markets of 99-00. Instead of just slowing down the economy they just burst the bubble. We were heading down hill anyway, but because of the disappearing resources, all of these cutbacks were multiplied.
