ECONOMIC GRAVITY KICKS IN

Paul Krugman:

Um, wasn't the stock market supposed to bounce back after Wednesday's big drop?

We shouldn't read too much into a couple of days' movements in stock prices. But it seems that investors are suddenly feeling uneasy about the state of the economy. They should be; the puzzle is why they haven't been uneasy all along.

The rise in stock prices that began last fall was essentially based on the belief that the U.S. economy can defy gravity -- that both individuals and the nation as a whole can spend more than their income, not on a temporary basis, but more or less indefinitely.
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I can't resist pointing out that the Bush administration's response to the squeeze on working families has been, you guessed it, to accuse the news media of biased reporting.

On May 10 the White House issued a press release titled "Setting the Record Straight: The New York Times Continues to Ignore America's Economic Progress." The release attacked The Times for asserting that paychecks weren't keeping up with fixed costs like medical care and gasoline. The White House declared, "But average hourly earnings have risen 3.8 percent over the past 12 months, their largest increase in nearly five years."

On Wednesday John Snow repeated that boast before a House committee. However, Rep. Barney Frank was ready. He asked whether the number was adjusted for inflation; after flailing about, Snow admitted, sheepishly, that it wasn't In fact, nearly all of the wage increase was negated by higher prices.

I can confirm that the home building industry is far less optimistic for next year's closings now than they were last fall. And home building, as Krugman states later in the piece, has been a major if not THE major factor propping up the economy.

Tags: Paul Krugman, economic gravity