October 30, 2009
by Irwin Stelzer
It has been a long time since the economic data have been flashing positive signals, and an equally long time since consumers, businessmen and occupants of the White House have been so gloomy. It's worth considering why this disjunction of fact and perception is dominating the economic news.
Start with the data. The economy grew at a quite satisfactory annual rate of 3.5 percent in the third quarter. The Federal Reserve's survey of business conditions around the United States reports "either stabilization or modest improvements in many sectors. ... Reports of gains in economic activity generally outnumber declines." There follow the usual warnings that improvements are from low levels, and that setbacks remain possible, but the news is better than it has been for some time.
Retail sales are showing a bit of strength, and the news from the housing market is no longer one of unrelieved gloom. Although sales of new homes fell slightly last month, inventories of unsold homes are well below their peak, and sales of existing homes are up, as are prices.
And some corporate news is actually good: IBM is so confident that business is picking up that it is increasing the purchase of its own shares, Verizon Wireless reports the highest increase in its customer base since 2005 and -- most important -- Caterpillar, the world's largest maker of construction equipment, is signaling a revival of the manufacturing and construction sectors by rehiring some of the 34,000 workers it has laid off in the past two years.
None of this seems to matter to the psyches of the businessmen with whom I speak, the consumers about whom I read or the White House. Businessmen tend to look further ahead than most participants in the economy -- consumers worry about paying the rent or the mortgage next month, and politicians worry about tomorrow's polling numbers and the November congressional elections.
Corporate executives fear that a new banking crisis will emerge when commercial property loans come due and consumer credit card defaults mount. They see an administration and Congress that are spending the U.S. into such a deep debt hole that the dollar will continue to decline, perhaps at an accelerating rate, forcing the Fed to raise interest rates to depression-inducing levels to prevent a collapse of the currency.
They think taxes will have to soar to bring the deficit under control. They also see in the White House a man whom they believe has no use for a market economy, preferring instead to turn the management of the country over to a series of czars who set bankers' compensation, run the domestic automobile industry, take over the health care sector and issue some 85 percent of the nation's mortgages.
Small-business men are more concerned about the Obama administration's emerging $1 trillion health care plan, which will drive up their costs, and with the new taxes that are aimed squarely at the income groups into which small-businessmen generally fall. So they won't expand or hire.
Which is why the White House is so unhappy. The president's priorities are jobs, jobs, jobs, another way of saying votes, votes, votes. Which is why he is considering a program that would give tax credits to employers who added to their work forces.
Consumers are the other unhappy member of the business-political-consumer troika. Consumer confidence fell in October for the second consecutive month, no surprise given the weakness of the job market.
What is one to make of all of this? In my view, the recent 3.5 percent growth rate is sustainable in the near term. Inventory building, the increased exports resulting from the declining dollar, stimulus money that is only starting to hit the economy and other spending created by Congress in anticipation of the November elections will combine to provide a boost.
In the longer run, however, the pessimism of the business community seems justified. The White House and the Congress are dominated by politicians with little understanding of what makes an economy grow sustainably, and a devotion to spend-and-tax that bodes ill for the future of the dollar as a reserve currency, and for future generations whose living standards will be reduced by the need to pay the bills Obama will leave in his wake.
However -- there is always a however. What politicians have created, other politicians can put asunder. The problems that have so many so gloomy are reversible. As Lawrence of Arabia tried to persuade his fatalistic Arab allies, "Nothing is written."
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.
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