The endless repetition of bearish predictions for the U.S. and world economies grows monotonous, but I thought it worth recapitulating some of the prognostications made by UPI Chief Economics Correspondent Ian Campbell and me over the last two years, to demonstrate that our track record has been quite good, and then answer the obvious question: Am I simply a stopped clock, a “Mister Grinch” of economic analysis, or is there a set of circumstances under which I would turn bullish?

As a good example of this, I give my first “Bear’s Lair” column, written on Election Day 2000, which looked forward four years, as follows: “President (Gore)/(Bush) stunned by repudiation as president-elect (Pat Buchanan)/(Ralph Nader) heads for landslide victory.

“President (Gore)/(Bush) (scowled like Herbert Hoover)/(pouted like Jimmy Carter) as he conceded defeat after 49-state landslide that leaves (Reform)/(Green) Party in full control of House and Senate.

“Total repudiation of President (Gore)/(Bush), (Democrat)/(Republican) policies, current $500 billion budget deficit and what has become known as the “baby bubble” generation.

“New era of reconciliation expected after bitterness of last year’s Greenspan impeachment hearings.

“On Wall Street, Dow crept over 3,800, S&P500 rose to 526.4 and NASDAQ to 651.2 in relief at (Buchanan)/(Nader) victory and decline in unemployment to 15.2 percent.”

My central theme, of a huge stock market decline, wiping $10 trillion of U.S. stockholders’ wealth, hasn’t quite happened yet, but it looks a lot more plausible than it did then. So, too, do the political, economic and budgetary effects such a wipeout would have — indeed, at present rate of progress, $500 billion may be a conservative estimate for the budget deficit by the 2004 election. Only the unemployment number now looks a little high — one hopes. Also, I suppose there is little chance of an Alan Greenspan impeachment hearing in 2003, though again one can always hope! Politically, I stick to my view then: 2004 is likely to produce a president in the extreme opposite political direction to the incumbent; in reality, therefore a very liberal Democrat with policies close to those Nader espoused in 2000.

Two weeks later, November 20, 2000, I looked at the New Economy: “The greatest stink-bomb so far has come in the area of the New Economy, where each week sees significant new bankruptcies and stock values in many cases are down 90 percent from their highs. Even bulls now admit that the New Economy hype a year ago may have been something of a bubble, for a bear, the question poses itself: Was it just an innocent bubble, or was there a substantial element of fraud involved?”

I came down on the side of fraud, which again looks prescient: “In my view, there are two areas of the New Economy boom where fraud would seem to have occurred; the flotation of companies at valuations which could never have been justified by their prospects, and the deception of investors by unfair earnings figures based on unacceptable accounting practices.” In particular “The most egregious fraudulent representation in the New Economy, and in much of the old economy, relates to management stock options.”

Nothing special now, but by no means conventional wisdom then.

Three weeks later, in “Merchants of Falsehood” I forecast a search for scapegoats: “However, the most appropriate victims are the accountants, stock analysts and rating agencies, whose relaxation of standards and tolerance, even encouragement of falsehood have fueled the speculative boom.”

For a less extreme, but also remarkably prescient view, take Campbell’s Global View of December 14, 2000, looking at the global implications of a U.S. recession: “Say that the U.S. economy records low growth, only around 1 percent in 2001, and something a little worse in 2002. A slowdown of this magnitude would constitute in most people’s minds a “hard landing.” What would it mean for the rest of the world?” Spot on for 2001, we now know. His 2002 prediction would mean a pretty sharp slowdown from here (because of the first quarter strength), but my money would be on him being correct again.

Again, on February 9, 2001, Campbell analyzing the potential shape of the recession: “Perhaps speedy cuts in interest rates and taxes will cause a mild rally in the economy late this year, which will fizzle out in 2002 as the end of excess again asserts itself, despite the softening of fiscal and monetary policy. That would be the end result of Bush’s tax-cutting effort: not a U-shaped recession but a perhaps longer and worse one with Dubya written all over it.”

February 5 2001, I analyzed the U.S. “productivity miracle” of the 1990’s, and showed that it didn’t stand up to scrutiny, with total factor productivity growth lower than in the 1980’s. Investors still believing in the “miracle” and owning tech stocks at that point could have saved themselves some grief. The NASDAQ index at that point was around 2,600, more than double its current level.

On the U.S. budget position, I was also prescient, forecasting in July 2001, at a time when the official Office of Management and Budget forecast was a surplus, that the budget deficit for the year to September 2002 would be $200 billion (Current OMB forecast $160 billion deficit, but they’re still counting.)

Finally, on Latin America, this column on October 9 2001, in “The Darkening Continent” wrote: “Of all emerging market regions, the one with the greatest long-term problems may be Latin America.” I forecast the Argentine default, Venezuelan political unrest, and a serious debt crisis in Brazil. Again, conventional wisdom now, but not then.

Of course, some of Ian’s and my predictions have been wrong (for one thing, we haven’t always agreed) and in some cases, including the full depth of the recession, we’re still some way from being proved right or wrong. But frankly, I’ll take our track record over the last two years against anybody else’s.

So what next? Well, for a start, we haven’t hit bottom yet, because the stock market remains overvalued. I would expect the market to continue downwards, by all means with some even quite lengthy “secondary recoveries” like that of September 2001 to March 2002, until it reaches a level of 5,000 on the Dow and 600 on the S&P 500 Index, the level at which in the current economy, with current policies, it can be said to be fairly valued by historical standards. Then it will doubtless “overshoot” a little, possibly to levels around that in my November 2000 prediction, although not necessarily exactly on Election Day 2004 itself. By definition, only when the stock market has become fairly valued can one be bullish about the market, and about the economy as a whole.

There are a however a number of worrying potential political factors which could make the recession worse, and the equilibrium lower, than outlined here.

First, a revival in world protectionism could send us into a repeat of the 1930’s, which is definitely NOT postulated in my gloomy forecast for stock prices. An equivalent Dow decline to 1929-32 would have the Dow bottoming at 1,400, not 3,800, and still being below 5,000 in 2015. A couple of months ago, with the steel tariffs, lumber tariffs, and the farm bill, this looked a high probability danger. Now, with the president having gained “fast track” negotiating authority, which he will presumably use, and with a steel trade war with Europe having been temporarily averted, the danger must be somewhat less.

Second, government spending has increased by more than 10 percent in the last year. If it continues to do so, possibly aided by a Democrat Congress in 2002 followed by a liberal Democrat president in 2004, then the probability of a lengthy recession (12+ years, like Japan’s) is greatly increased — in another article, last August, I demonstrated that high and rising public spending had more than a 50 percent correlation with lethargic economic growth. This, as well as Smoot-Hawley, caused trouble in the 1930’s, and is perhaps more likely than a huge rise in protectionism to do so again.

Third, debt losses in emerging markets and telecoms/Internet could cause a serious problem in the U.S. and world banking system. We are not all that far from this currently. If Brazil goes populist/socialist in October, we are presumably looking at a $320 billion debt default, which is larger than any so far. There was a serious banking problem in 1932-33; given the other strains on the federal budget, federal deposit insurance does not absolutely guarantee we will not have another one. Again, from the Japanese experience, such problems can well take a decade or so to work out, and cause huge collateral damage.

Finally, Wall Street and the tech sector could dig in their heels about expensing stock options, and in general making Generally Accepted Accounting Principles more transparent. Apart from the direct negative effect on investor confidence this would produce, it would also probably lead to more draconian regulation by an exasperated Congress, which would have a high probability of making matters worse and drying up the U.S. capital markets. Again, this happened in the 1930’s.

However, enough of gloom. There are also a number of policy moves which could be taken which would greatly improve the world’s growth prospects, in both the short and the long term. If one or more of these changes takes place, it means that U.S. and other Western governments have got a handle on the problems, and are coping with them rationally rather than in a populist manner; that fact alone should turn one considerably more bullish.

First, Congress could restore trust in stocks by removing the double taxation of dividends, by all means capping mortgage interest deductibility at say $10,000 in interest per annum to raise the same amount of revenue from equivalent socioeconomic strata. With investors having lost confidence in Wall Street and corporate accounting, and suffered huge losses on their portfolios, they will only regain confidence if they see a cash return on their investment. Taxing that return at a maximum of 61 percent (when corporate and individual taxes are included), compared with 20 percent for long term capital gains, is a crazy incentive to management to speculate with investors’ capital. These tax changes together would shift the pattern of investment away from McMansions and toward stocks, no bad thing for the U.S. economy in the long term.

Second, Congress and the president could get serious about public spending, ensuring that it does not increase as a percentage of gross domestic product, even though the economy is in recession. The example here is Neville Chamberlain, who in 1931 cut all public service salaries by 10 percent, restoring the cut only in 1935, when the economy was well on the road to recovery. (Britain came out of the 1929-32 slump much more quickly and fully than the U.S.) Such a cut, at a time of recession and high unemployment, would send precisely the right signal — public service job security is at its most valuable in such circumstances, and while public servants should be competitively paid, they should not be allowed to grow fat at the nation’s expense, as they did in the United States in the 1930’s.

Third, a free trade round could be agreed at Doha that included agriculture, textiles and steel, the products of most interest to the Third World. Such an agreement would be hugely helpful for those Third World economies that were well managed, allowing them to recover rapidly from the recession and resume their progress towards affluence. In turn, the trade opportunities this would generate for the West would pull the United States and Europe, too, out of recession. Comparative advantage is real, and must be taken advantage of.

Fourth, the IMF should be privatized, and the subsidies to Latin American governments that pursue corrupt big government policies stopped. Latin America, especially Mexico and Argentina, was, relative to the West, far more prosperous before 1914, when the election of a populist government in a country resulted in finance being cut off by the private sector banking system. The present arrangement, whereby well-paid bleeding heart public sector liberals always provide yet another subsidy from Western taxpayers, so that hard decisions never really have to be taken, is utterly pernicious. Chile did economically best of all Latin American countries in 1973-1988 not only because it had a better government, but because it was out of favor with the international aid agencies, so had to survive on its own resources and what it could raise from private banks.

I do not expect any of these four policy changes to be adopted quickly. When a majority of them are enacted, then the Bear will turn Bull.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.