Bad News Has Its Good Points
From the June 8, 2007 Sunday Times (London0
July 10, 2007
by Irwin Stelzer
I always worry that British readers will be exposed only to large doses of bad news from the United States, and might react by making irrational investment decisions – or merely by worrying too much. So let’s look at the good news lurking in the bad-news headlines.
The dollar is falling: True, and it means that Americans planning to take an overseas holiday this summer will find it costs more than they had planned – especially in London, where it now takes more than $2 to buy £1. This means that fewer American tourists will head for Britain and Europe, or spend less while they are here, while British tourists, clutching their almighty pounds, head for New York and other cities to deplete the shops, fill the hotels and enjoy the restaurants.
It also means made-in-America goods are now cheaper for foreigners to buy, which explains the boom in American exports. The net result is a shrinking US trade deficit, just what economists have been saying is needed if the world economy is to stay on its growth path.
The subprime mortgage market is imploding, making all lenders skittish: True, and about time. Lenders are no longer falling over themselves to make credit available to people with only marginal prospects of repaying those loans. That might be tough on some potential home-buyers in America, and make it more costly for private-equity entrepreneurs to borrow the funds they need to complete highly leveraged purchases, but private pain should not obscure public gain. Any private-equity deals that are marginal just won’t happen, and that capital will be allocated to places where it can be used more efficiently, which will give a boost to productivity.
We might even be seeing the end of the era of excess liquidity that has had lenders thrusting cash at borrowers, waiving the usual protective covenants, and charging interest rates somewhere between generous and foolhardy. Result: the risk profile of lenders will be brought more into line with sanity. Fortunately, as John Waples pointed out in these pages last week, this adjustment is likely to occur without “full-scale contagion”, a systemic collapse.
The globe is warming: This may or may not be true, but if it is, take heart. The consequences will be nowhere near as Gorey as some predict. There will be winners as well as losers. Shipping time between America’s Atlantic and Pacific coasts will plummet as lanes open through the melting Arctic; alternative-energy firms will prosper; agriculture in Russia and Canada will boom; and maple syrup is already flowing in upstate New York in January, according to The Economist. Think of a winter holiday on the beaches of Blackpool.
The rich are getting richer: True, but that is not a problem as long as the money is fairly earned and equitably taxed. And the most visible of the new rich, the private-equity deal-makers, meet the first criterion: they are performing a real service by taking over badly run companies, whipping them into shape, and returning them to the public markets. But it is not clear that taxing part of the entrepreneurs’ earnings at low capital-gains rates is equitable. Again there is good news: in some countries there would be challenges to the entire economic system by the disgruntled masses; in America there will be careful consideration of needed adjustments by a democratically elected Congress. Another excess will, as the young people like to say, be history.
Airlines and airports are overcrowded: True, which is why travel this summer was doomed to be a nightmare of overbookings and delays even before heightened security measures at British airports. But remember, this is true only because deregulation makes it possible for so many people to afford air travel, which was once reserved for the affluent. Besides, the crowding has so magnified the shoddy nature of BAA management of Heathrow, that the authorities are beginning to real-ise that the cause might be a lack of incentive by this monopolist to respond to the needs of captive trav-ellers. Perhaps our short-term pain will result in long-term gain.
A billion dollars is being spent on political campaigns in America: This upsets many Britons, who worry that an American president, beholden to campaign contributors, will not exercise power and influence in a manner needed if world order is to be maintained. It is true that the candidates seeking their parties’ nominations, and the eventual winners who will face off in the general election, will spend about $1 billion in the two years between the campaigns’ start and the time we go to the polls in November 2008. But the good news is that America is rich enough to afford the rough-and-tumble of political debate that, given the size of the country, has to take place on television or after expensive jetting from state to state. As the Washington Post columnist George Will has pointed out, in those two years we Americans will spend just as much on Easter candy.
The American government is incompetent: It could not provide adequate relief to the victims of Hurricane Katrina or the chaos in Iraq; it cannot control the nation’s borders, or develop a policy to reduce American dependence on foreign oil, or figure out how to save the middle class from the depredation of a tax structure containing a feature – the Alternative Minimum Tax (AMT) – originally aimed at millionaires, but now biting into the budgets of middle-class families. No silver lining to this dark cloud.
But most other bad news is really not as worrying as it at first seems.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.