Crisis? Not in My Backyard, Say Americans
From the September 2, 2007 Sunday Times
September 4, 2007
by Irwin Stelzer
You know that the president’s most trusted advisers are jumping ship in increasing numbers. And that we Americans are finally getting our come-uppance for years of too-much-borrowing for too-big-cars and McMansions that gobble energy and warm the globe. House and share prices are falling, the Iraqi government can’t seem to capi-talise on the successful surge, and our bridges are falling down – the collapse of one of the tens of thousands of bridges in the United States received more press coverage in Britain than any event with the possible exception of the in-and-out rehab experiences of various celebrities.
No wonder, then, that Americans are in a deep funk. Except we aren’t. The latest Harris Interactive poll shows that “Overall, Americans are definitely satisfied with the life they lead.” Almost all – 94% – are either very satisfied (56%) or somewhat satisfied (38%). This is not only a very high figure. It is increasing – from 91% in 2003.
You may have heard tales from various Democratic presidential wannabees about “the other America”, and about the huge numbers of Americans who have not shared in the nation’s recent increasing economic prosperity. Odd, then, that over half of all adults say their situation has improved in the past five years, and only 17% say it has become worse (a quarter say they are in about the same place they were five years ago).
Note that all these data relate to how people feel about their personal lives. When it comes to the country, only 19% say America is moving in the right direction. This is one of those odd phenomena – most people are satisfied with their own schools but say that America’s education system is a mess; most people like and reelect their own congressmen, but hold Congress in low repute (18% approval rating); most people like the immigrants, legal and illegal, that work for them, but are against immigration in general. Familiarity breeds enchantment, and distance lends contempt when it comes to voters’ assessments of American institutions – except for the military, which remains the most respected of all American institutions.
That’s the way we are as we enjoy the three-day Labor Day weekend. As you read this, millions of hot dogs and hamburgers are being grilled in America’s backyards, and millions of couch potatoes are watching their favourite baseball team or the tennis matches at the US Open.
Meanwhile, on the economic front the good news is that not all the news is bad. Yes, the housing market is in disarray, with inventories of unsold houses rising, prices falling and many families unable to meet their mortgage obligations. And yes, more bad news is to come when low, initial mortgage-interest rates are “reset” at higher levels.
Whether the troubles in the credit and financial markets will do more than slow the growth of the “real” economy is the subject of considerable debate. The economy grew at a healthy annual rate of 4% in the second quarter, but that was before the recent upsets in financial markets. Last month sales of durable goods rose by a healthy 5.9%, but other indicators suggest that consumers are starting to rein in their spending.
The unemployment rate has been a low 4.6%, but that is before the lay-offs in the financial-services and residential construction industries are taken into account. Banks’ balance sheets seem healthy, but the mark-downs in the value of some of their dicier assets have not yet been factored in. World growth has been robust and driven American exports, but that was before the problems in German, British and other financial markets made themselves felt, and before China decided to hit the brake with a bit more force.
Some analysts are convinced that unless the Federal Reserve Board’s monetary policy committee cuts interest rates no later than its September 18 meeting – sooner would be better – the economy will lapse into recession. The Fed is listening: chairman Ben Bernanke says he is “prepared to act as needed”.
But the Fed has to worry about two things. First, Bernanke does not want to send a signal that no matter how imprudent lenders and borrowers have been, he will bail them out. That would create what economists call “moral hazard”. Second, he has to consider whether a cut in interest rates might add to inflation-ary pressures. Core inflation, which excludes food and energy, is tame. But include those items – people do eat and do drive – and the situation becomes complicated. The original reason for excluding food and energy was that prices of those commodities tended to be volatile, making monthly changes unrevealing of underlying trends. But that was then and this is now. We might be witnessing, not volatility, but a long-term upward trend in oil and food prices. The Opec cartel has learnt to gear its members’ output to the level of crude and petrol inventories, putting a floor under prices at a time when production is not keeping pace with demand.
And food prices are now reflecting the decision of several governments to convert corn and other products to petrol in the tank rather than food on the table. Bernanke knows all this. He knows, too, that an unnecessary or premature cut in rates would scupper his antiinflation policy, while an overly delayed reduction in rates will tip the economy into recession. So he will have a somewhat more fraught Labor Day weekend than the vast majority of satisfied-with-life Americans. But my guess is that in the end he will take comfort from Friday’s report that incomes and spending are rising nicely, with inflation at unworrying levels, and conclude that his current policy is just about right.
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.