MSN By Robert Shapiro Posted Tuesday, April 15, 2003, at 8:29 AM PT

A few years ago, gurus of the New Economy insisted that the business cycle was dead: Growth could go on forever. "The Long Boom," some called it. It didn't take long for the Nasdaq crash and the 2001 recession to puncture that claim. The New Economy acolytes were right that the pattern of growth is changing—but not as they thought. The current business cycle is notable for having the mildest recession and weakest expansion in modern times.

Normally, the higher the economy soars, the more sharply it falls when the time comes. This time, after growing for 10 uninterrupted years—the last five by more than 4 percent a year—the economy landed fairly gently with three quarters of mildly negative growth, in a year in which the economy still managed to grow 0.3 percent. The secret was that productivity continued to rise through this downturn. It usually doesn't.

The fall was soft, and so is the recovery. In a normal cycle, the first two years of recovery are banner times—rising employment and incomes release pent-up demand, which increases corporate revenues and revives investment. In the seven previous business cycles since 1950, the economy has grown, on average, by 5.6 percent in the first year of expansion and by 4.6 percent in the second. But it's not happening this time: Despite the biggest productivity gain in 50 years—4.6 percent—the economy grew just 2.4 percent in 2002, less than half the average for Year One. The outlook for this year, Year Two, is even worse. The International Monetary Fund's new forecast, for example, has the U.S. growing 2.3 percent this year, and that's probably too optimistic.

The White House knows that no president has been re-elected in the last half-century with less than 3 percent average annual growth in his first term. And a few weeks ago—after February data showed shrinking orders and shipments of manufactured goods, weakening wholesale trade, and flat consumption—advisers privately told President Bush that the economy could be falling off a cliff. So the administration has turned up the heat for more tax cuts: If growth is slow, the tax cuts can at least lift people's post-tax incomes next year. But with or without more tax cuts, don't bet on gross domestic product growing more than about 2 percent this year.

Brace as well for more unemployment, because that's what happens when fast-rising productivity collides with slow growth. Do the math: When workers are producing 4.6 percent more output per hour, and total output grows only 2.4 percent, workers have to be working fewer hours. That's why the number of unemployed is 410,000 higher today than when the recovery began 15 months ago.

Why the economy experiences regular cycles of expansion and contraction has fascinated economists for at least 150 years. A generation ago, business-cycle theory was one of the main struggles between monetarists and Keynesians (a struggle both sides lost). For much longer than that, the debate has pitted market enthusiasts, who see recessions as healthy responses to market changes that should be allowed to run their course, against market skeptics, who see recessions as evidence of market failures that government should address.

Today's market enthusiasts often favor what's called "real business cycle theory." This theory holds that the economy expands and contracts when random fluctuations in the pace of technological progress change relative prices, affecting people's incomes and tastes. In this view, Moore's Law cut the prices of a host of goods and services that depend on information technology, spurring an explosion of demand that defined the 1990s boom. It's a view consistent with the central insight of modern growth theory, that innovation drives underlying growth rates. But it goes a lot further, by casting slow growth or recessions as evidence of a temporary decline in an economy's capacity to innovate and take advantage of the results.

The key premise of the market enthusiasts is that business cycles result from natural market processes: Bad things happen to good economies. The key implication is that government shouldn't interfere.

On the other side are the "New Keynesians," who reject the idea of recession as an efficient market response to changes in technology and taste. They believe that recessions result from large-scale market failures. In a typical case, demand falters for some reason, and markets fail to adjust prices and wages to reflect the change. Such "sticky" prices and wages push up unemployment and push down investment, producing a recession, because real wages are too high for all workers to be profitably employed and firms can't find enough buyers for their products at the prevailing price. The answer to such market failures is not to step aside but to get involved, with government providing stimulus that enables firms to sell their goods and keep their workers employed.

Unfortunately, both the enthusiasts and the New Keynesians face serious empirical problems. On one hand, technological progress occurs much too gradually to account for business cycles, even long ones. On the other, "sticky" wages and prices are much less important than they used to be: Outside of the public sector, organized labor long ago lost its ability to keep wages high when demand falls, and intensified competition from imports, deregulation, and innovation deny most firms the ability to maintain prices when demand wanes.

If not technology shocks or market pricing failures, what's driving the current business cycle? It's not terrorism or war. Terrorism doesn't exact sufficiently large direct costs to drive the economy; and it's hard to argue that its psychological effects have slowed growth, when the economy turned around in the quarter immediately following 9/11 and turned in its best performance in years in the quarter after that. Nor is there hard evidence that the prospect or reality of the war with Iraq punctured business investment and consumer spending.

Whatever the theory, the factors producing today's slow growth are pretty clear. The great boom of the '90s drew on high levels of virtually everything that matters to growth —innovation, credit, consumer demand, business investment, and exports. Today, technological innovation is still cranking along; but nothing else has really recovered. With unemployment rising and consumers carrying record personal debt from the '90s buying binge, consumer confidence has disappeared. Foreign demand is no help either: Exports are down, because the rest of the world is in worse shape than we are. Despite low interest rates, credit is less available as well: With accounting scandals making lenders more skeptical, and government no longer adding to the capital pool with budget surpluses but subtracting from it with deficits, firms with less than AAA credit rating have trouble borrowing funds. To top it off, higher energy prices from lower production in Venezuela has chopped perhaps a half-point off growth.

And perhaps most important, business investment hasn't recovered. With one-fourth of industrial capacity still idle, no one is building new factories or offices, and purchases of industrial and transportation equipment remain flat or nearly so.

The current cycle can teach important lessons about how a modern economy behaves. For starters, recessions can be a lot shorter and milder than we've been used to, if productivity keeps growing. But there's a price: When a short, mild recession follows an extended, productivity-driven boom, there's not enough pent-up demand to drive a strong expansion. The recovery can be even weaker if business, mesmerized by the long expansion, miscalculated by expanding capacity too much, thus discouraging new investment. Another lesson of today's mild cycle is that we have less control over these events than we used to, because the rising share of output involved in trade leaves our growth more vulnerable to global economic conditions.

Don't blame the business-cycle theorists for missing so much. Economic change has been so rapid and far-reaching lately—deep deregulation in sector after sector, great shifts in tax and spending policies, enormous progress in opening foreign markets, the emergence of mature global capital markets, and successive waves of technological and organizational innovation—that no model can hope to take account of it. And if change continues at its recent pace, the next business cycle may well seem just as peculiar as this one does.

Robert Shapiro, an undersecretary of commerce in the Clinton administration, is a fellow of the Brookings Institution and directs Sonecon, LLC, an economic consulting firm.

More the dismal science Why has the business cycle gone topsy-turvy? Will the war cause the dollar to collapse? Would terrorism damage the U.S. economy? What online role-playing games can teach us about economics. How to fix the grasshopper economy.

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Remarks from the Fray: What I think the author overlooks is the degree to which there has come to be a new meaning to the concept of "productivity" due to globalization. The recession which we entered when the dot.com boom ended was fairly typical of cycles seen in the 19th century at the time of paradigmatic production shifts… What made the 1990s so much more explosive was that there was far more capital available, since the government was no longer running deficits and military spending had been, relatively, scaled back. But when the shakeout came, we were back in the 19th century again, with this difference: when railroads went bust, the ones which survived were still American railroads employing American workers. That ain't true anymore. When a company in India wins an outsourcing contract over one in Indiana, the corporation realizes the lowered costs as profit from what appears as increased productivity but that money doesn't help OUR economy, because the laid off workers cannot take advantage of the lowered costs which increased productivity provides. Thus although "the books" don't look so bad in terms of productivity, which is indeed increasing output, consumers are not seeing the gains to the same degree, and what's happening is actually a lot worse than the numbers would have us believe. This, too, BEGAN to happen earlier with the Bush 41 recession of 1991, which really doesn't look very bad today. But the great complaint one heard at the time was that the numbers weren't telling the whole story. Indeed, the main reason Bush 41 lost the 1992 election was the perception that he was out of touch with the reality of the pain. Whatever his understanding of the economics, it's clear that Bush 43 is aware of the fact that he must be more concerned with the perception of how well the economy is doing than with how well it really IS doing. The problem is that there is nothing in any of his economic proposals that even relates to the problem, which is Americans out of work. Why on Earth should an American corporation which can realize satisfactory increases in productivity by outsourcing work to the Third World invest in the United States? No reason, as long as Bush 43 and, let's be fair, Clinton before him, doesn't even address the problem. --The_Slasher-8

It seems to me that attempting to avert or soften recessions by lowering interest rates to facilitate borrowing only prolongs the pain from a downturn. We've had two recessions in a row were the recovery has sucked -- probably not a coincidence that the Fed has cut rates aggressively in both. maybe a hands-off approach to monetary policy would help shake out the over-investment in the economy quicker, leading to a more robust recovery. You can't have pent up demand when everyone is saddled with debt that was just too good to pass up at those rates. --EconStudent2

By TOM MORTON Casper Star-Tribune staff writer

The coalbed natural gas industry has waited 34 months for the U.S. Bureau of Land Management to issue its Environmental Impact Statement (EIS) on drilling on federal land in the Powder River Basin, an industry official said Monday.

It will probably wait some more, Bruce Hinchey, president of the Petroleum Association of Wyoming, told the Casper Rotary Club. "We're at 34 months and counting," he said.

"We were expecting it on the 17th (of April), but it was delayed a week," Hinchey said. "We expect a lawsuit by environmental groups."

That would mark the latest delay in new drilling in the Powder River Basin that has slowed to a standstill now that the federal government has issued the maximum number of drilling permits, he said.

Developing a natural gas field in Wyoming takes between four and five years, Hinchey said.

He laid the blame for the delay in the basin on the federal government's environmental policies, such as allowing drilling at certain times of the year but not at other times.

Some federal policies are extreme, he said.

For example, if digging for a pipeline will expose rocks that are a different color than the ground, the excavated rocks must be painted the same color as the ground, Hinchey said.

In response to a question from Rotarian David Bishop, Hinchey said that there's no way to calculate how much Wyoming has lost in revenues because of the federal policies and the delays in new drilling.

Hinchey, former Wyoming House Speaker, became director of the PAW during his last term in the Senate in 2002.

During his talk, he gave a brief overview of the oil and gas industry's history in Wyoming, starting with the first well 118 years ago drilled southeast of Lander.

Now, 20 of Wyoming's 23 counties -- with the exceptions of Platte, Goshen and Teton counties -- have oil or gas production, Hinchey said.

"We don't have any yet in Yellowstone, but we're working on that," he joked to a lot of laughter.

More than 15,000 miles of pipeline operated by 42 companies, Hinchey later added, are in all Wyoming counties.

In other statistical matters, he said the deepest well drilled in Wyoming was more than 25,000-feet deep, and yielded a dry hole. The deepest producing well is 24,877 feet, he said.

The oil and gas industry employs about 22,000 people who earn an annual payroll of $850 million, he said.

While the industry has begun to decline in Campbell County -- in the Powder River Basin -- it is up in Carbon, Sweetwater and Sublette counties, Hinchey said.

Hinchey showed the audiences charts of production and sales that marked the downward trend of oil production and the upward trend of gas production.

Limited pipeline capacity, however, hinders the rate of gas production, he said.

Yet that production pays more than $900 million a year for much of Wyoming's state and local government operations, Hinchey said. "That equals a direct payment of $1,900 for every person in Wyoming. ... You can see without the oil and gas industry what kind of taxes you would pay."

He also listed the countries that export oil to the United States, with the most coming from Canada, followed by Saudi Arabia, Mexico, Venezuela, Nigeria, the United Kingdom, Iraq, Norway, Angola and Algeria.

"Fifty-seven-point-eight (percent) of the total is from foreign countries," Hinchey said. "That's why it's so important for Congress to have the national energy policy bill."

Copyright © 2003 by the Casper Star-Tribune published by Lee Publications, Inc., a subsidiary of Lee Enterprises, Incorporated

<a href=www.middle-east-online.com>Middle East On-line First Published 2003-04-15, Last Updated 2003-04-15 15:04:23 By Amelie Herenstein - PARIS

Analysts argue OPEC members will reach compromise to cut oil production in bid to avoid slide in crude prices.

OPEC is hoping to avoid a slide in crude prices by cutting production later this month, but experts say an agreement on who should reduce output by how much could prove hard to broker between member countries eager to preserve market share.

After days of uncertainty over the date of its next ministerial meeting, called earlier this month by president Abdullah bin Hamad al-Attiyah, an official at the oil cartel's Vienna headquarters confirmed on Tuesday the gathering had been scheduled for April 24.

"The date of April 24 is now official, and it is confirmed that the meeting will be held in Vienna," the official said on condition of anonymity.

Ministers from 10 of the organisation's 11 mainly Arab member states are set to attend the meeting, with Iraq's seat likely to remain empty, another OPEC source said.

Both al-Attiyah, who is Qatar's serving energy minister, and his Algerian counterpart Chakib Khelil recently suggested that output would have to come down.

Khelil called for OPEC members to begin strictly observing the cartel's current production quotas which add up to a total 24.5 million barrels a day.

This would amount to a production cut of around two million barrels a day without touching the quotas, according to unnamed OPEC officials.

Despite signs of an emerging consensus that production will have to be cut this month, however, the way the cuts are shared out between OPEC governments could still prove delicate.

Saudi Arabia is likely to be in the spotlight, after it increased output by 21 percent to 9.5 million barrels a day from November to March, to compensate for production problems linked to crises in Iraq, Nigeria and Venezuela, according to a report by the London-based Centre for Global Energy Studies (CGES), published on Monday.

"Saudi Arabia will be looked at to lead the charge," said Raad Alkadiri, director of Washington-based consultancy PFC Energy.

"But the Saudis will want to ensure that other members of OPEC are also cutting back on production."

Monday's CGES report also suggested the Saudi position could be key to the outcome of the OPEC talks.

"Some within the Saudi kingdom consider that a production cut should be shared out between members in proportion to their production level - which could lead to a possible conflict," it said.

OPEC would have to reduce oil output to keep prices within its target band of 22-28 dollars per barrel, the report said, adding that a cut of half a million barrels a day would be enough to meet that goal if Iraqi oil were to remain offstream for the next few months.

But Iraqi oil soon could start to flow again, after Turkey said on Tuesday that storage facilities at its southern Ceyhan terminal were full, with 1.8 million tonnes of Iraqi crude waiting to be cleared for sale by the United Nations or a postwar Iraqi administration.

PFC Energy's Alkadiri predicted a compromise would be reached combining a reduction in quotas with a pledge to stick more closely to the OPEC output limits.

Pierre Noel, an analyst with French think-tank IFRI, said OPEC governments would have little trouble reaching a formal agreement - it was what they did next that would really count.

"It's a very unstable system. You've got every interest in promising cuts during the meeting and then not implementing them when you get home," he said. "The history of OPEC is a history of cheating."

However, Noel said the cartel's past three years in maintaining oil price stability could curb members' inclination to bust quotas.

Some had probably already quietly cut production, he added. "It seems certain to me that Gulf states, particularly Saudi Arabia, will already have reduced output."

The April 24 meeting would be more concerned with sending the right message to markets, Noel predicted.

<a href=www.quicken.com>Dow Jones Tuesday, April 15, 2003 09:42 AM ET     CARACAS (Dow Jones)--Organization of Petroleum Exporting Countries member Venezuela wants to keep pumping as much oil as possible even if, as expected, the group reduces output to bolster sagging world prices, a senior Venezuelan Oil Ministry official said Tuesday.

"We need to recover what we've lost but that doesn't mean we don't support OPEC's intention to stabilize the market," the official told Dow Jones Newswires on the condition of anonymity.

But " Venezuela has every intention to return to its quota as soon as lost revenue has been made up," the official said.

Venezuela's government claims output has now topped 3.1 million barrels per day - versus its current OPEC quota of about 2.8 million b/d - after being down as low as 150,000 b/d after a general strike that began Dec. 2 all but shut the vital oil industry. The government has said it lost about $7 billion due to the strike.

Former managers at state oil company Petroleos de Venezuela SA have put production at closer to 2.6 million b/d.

OPEC members are expected to meet April 24 in Vienna to decide whether to cut production.

-By Jehan Senaratna; Dow Jones Newswires; 58212 564 1339; jehan.senaratna@ dowjones.com

CNNMoney-Reuters April 15, 2003: 8:43 AM EDT

LONDON (Reuters) - OPEC confirmed Tuesday that it will hold an emergency meeting April 24 in Vienna to discuss cutting supplies in response to a sharp drop in world oil prices.

Despite a halt in Iraqi exports due to the U.S.-led war on Baghdad, prices have slumped by 30 percent in a month on a rising tide of exports from U.S. ally Saudi Arabia and other cartel members.

"It's definitely the 24th," an OPEC spokesman said, clearing up uncertainty over possible dates for the meeting.

Algerian Oil Minister Chakib Khelil said Monday that OPEC could stop prices falling further simply by improving compliance with its agreed ceiling of 24.5 million barrels per day (bpd), as the cartel is now pumping some two million bpd above that.

Other members could push for a cut in formal quota limits.

The Arab-dominated cartel will also discuss the return of Iraqi exports after the war, although this is unlikely to affect quotas yet.

OPEC President Abdullah al-Attiyah said last week that oversupply on world markets already topped two million bpd, and could reach four million with the return of Iraq in the months ahead.

Countering this view, Algeria's Khelil said any decision by OPEC now should take into account an expected demand rebound in the summer which could see prices rise again.

Commercial oil stocks worldwide are well below normal levels due to a series of supply interruptions from Venezuela, Nigeria and Iraq, although they have shown some signs of recovery in recent weeks.

Despite the sharp fall in prices, OPEC's reference price is now hovering around OPEC's target level of $25 per barrel, having topped $33 last month.

Saudi Arabia stepped in to cover for the Iraqi stoppage, and now accounts for three-quarters of OPEC's output above quota. Its view will be crucial.

Oil industry think-tank, the Center for Global Energy Studies, said Saudi Arabia could even seek to retain most of its recent output surge by negotiating cuts on the basis of current output, instead of quotas.

This would provoke a storm of protest from other members, who are all keen to protect their market share.

When Iraqi sales do resume, analysts believe they will rise gradually and take several months to regain their pre-war level of 2.5 million bpd.

OPEC will probably give Baghdad freedom to pump at will until it reaches its historical quota level above three million bpd, which Iraqi experts expect to take several years.

Before Iraq's invasion of Kuwait in 1990, Baghdad had the same quota level as Iran at 3.1 million bpd. Iran's quota has since risen to 3.6 million.

U.S.-backed Iraqi exiles formulating postwar oil policy for Iraq think it will take three or four years to regain output capacity of 3.5 million bpd, according to briefing papers obtained by Reuters.