Siren Songs

This week economic news report continued expansion of the economy for the US for ten continuous quaters at a healthy and manageable rate of over 3%. As reported by the WSJ yesterday:
Treasury Secretary John Snow, in a prepared statement, called the growth "outstanding" and "very good news for American workers and those seeking jobs." A minimum annual growth rate of 3% to 3.5% is considered a good sign of prosperity and favorable for adding new workers to the economy. Although previous third-quarter growth estimates exceeded those rates, the earlier data also gave off mixed inflation signals, which caused concern among some analysts.

Inflation indicators in yesterday's report, though, were revised downward. Consumer prices excluding food and energy, the Federal Reserve's preferred inflation measure, rose at a 1.2% annual rate, down 0.1 percentage point from the original estimate. That would be the lowest core-inflation rate in more than two years.

Today's WSJ follows that with updated employment figures:
Hiring recovered in November from a hurricane-induced slowdown in the previous two months, as employers added 215,000 jobs to U.S. nonfarm payrolls. The unemployment rate held at 5%.

The Labor Department's latest report on the employment situation suggested that employers were more willing to take on new workers as the economic effects of a destructive hurricane season faded. Energy prices, which soared as powerful storms roiled oil and natural-gas production, have declined recently, and headaches caused by disruptions to transportation have eased.

Past payroll estimates were revised to show a 44,000-job increase in payrolls in October and a modest 17,000-job climb during September. Previous estimates showed a 56,000 increase in October and an 8,000 decrease in September.

"The September weakness was clearly associated with the devastating direct effects of Hurricane Katrina, and it is possible that October's job growth was held down somewhat by the indirect effects of Hurricanes Katrina and Rita," said Kathleen Utgoff, commissioner of the Bureau of Labor Statistics. "To put the November increase in perspective, from January through August of this year, payroll employment growth averaged 196,000 per month."

Yet economic pessimism hangs in the air. Why?
This onslaught of negative thinking is clearly having an impact. During the 2004 presidential campaign, when attacks on the economy were in full force, 36% of Americans thought we were in recession. One year later, even though unemployment has fallen from 5.5% to 5%, and real GDP has expanded by 3.7%, the number who think a recession is underway has climbed to 43%.

This is a real conundrum. It is true, bad things have happened. Katrina wiped out a major city and many people are still displaced. GM has announced massive layoffs. Underfunded pension plans are being handed off to the government. Oil, gasoline and natural gas prices have soared. Despite it all, the U.S. economy continues to flourish.

One would think that this would give pouting pundits reason to question their pessimism. After all, politicians who bounce back from scandal get monikers such as "the comeback kid." Athletes who overcome personal tragedy or sickness to achieve greatness are called "heroes." This is a quintessential American tradition, and the economy is following the script perfectly. The more hardship it faces, the more resilient it appears. The list of pessimistic forecasts that have been proved wrong grows by the day.

The trade deficit was supposed to cause a collapse in the dollar; but the dollar is up 10% versus the euro in the past eight months. The budget deficit was supposed to push up interest rates; yet the 10-year Treasury yield, at 4.5%, is well below its 2000 average yield of 6% when the U.S. faced surpluses as far as the eye could see.

Sharp declines in consumer confidence and rising oil prices were supposed to hurt retail sales; but holiday shopping is strong. Many fear that China is stealing our jobs, but new reports suggest that U.S. manufacturers are so strong that a shortage of skilled production workers has developed. And since the Fed started hiking interest rates 16 months ago, 3.5 million new jobs and $750 billion in additional personal income have been created. Stocks are also up, which according to pundits was unlikely as long as the Fed was hiking rates.

So, where is all of the pessimism coming from? Some say that the anxiety is warranted. The theory goes like this: Globalization and technology are a massive force that levels the playing field. Because capital and ideas can move freely around the world, foreign wages will move up, while U.S. wages fall, until some sort of equilibrium is found. It's a compelling story. After all, real average hourly earnings in the U.S. fell 1.6% during the 12 months ending in October.

However, there are numerous reasons to believe that this statistic is not giving an accurate picture of the economy's health. First, history shows that when oil prices rise sharply, real earnings take a temporary hit. As a result, a snapshot of inflation-adjusted earnings data in the wake of Katrina is misleading.

Moreover, for the past 30 years, real average hourly earnings have declined by an annual average of 0.1%. But this can't possibly reflect reality. In the past 30 years, cell phones and computers have become ubiquitous. Home and auto ownership have climbed. More people dine out; travel; attend sporting events, movies and rock concerts; and join health clubs. Over those same 30 years, real per capita consumption has increased at an average annual rate of 2.3%. Hourly earnings data do not include tips, bonuses, commissions or benefits, and therefore will always lag actual increases in living standards.

Some observers of the current economy, such as New York Times columnist Thomas Friedman and former Clinton economic adviser Gene Sperling, argue correctly that globalization is inevitable and, in fact, good. Nonetheless, they focus on those who are hurt by the transitional impact and suggest that government intervene to offset any damage from plant closures or job losses.

But this has never worked. The history of economic progress is one of innovation and change. This "creative destruction" can never be a pain-free experience for every individual involved. The new must replace the old. Attempting to alter this fact of life, and create a utopia where no one experiences pain, has always led to more unhappiness than before. Germany's near 11% unemployment rate and the recent riots in France are the latest evidence of government's inability to successfully fight market forces.

One key reason the U.S. economy has outperformed other industrialized nations, and exceeded its long-run average growth rate during the past two years, is the tax cut of 2003. By reducing taxes on investment, the U.S. boosted growth, which in turn created new jobs that replace those that are lost as the old economy dies. Ireland is also a beautiful example of the power of tax cuts to boost growth and lift living standards.

Economic growth is the only true shock absorber for an economy in transition. To minimize the pain of technological globalization and address the anxiety that these forces are creating, free-market policies must be followed. While tremendous pressures are building to increase government involvement in the economy, it is important that the U.S. stay the course that brought it out of recession.

There is a malaise in the mainstream media. It is not just about Iraq or terrorism. All the mainstream media see is destruction. Be careful of their siren songs.

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