Sunday Times (London)
November 1, 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.
Let’s start with the data. America’s economy grew at a 3.5% annual rate in the third quarter (preliminary figures). The Federal Reserve Bank’s survey of business conditions reports “either stabilisation 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.
Economists at Bank of America Merrill Lynch agree: “Recent data point to ... modestly higher overall growth.” As do those at Goldman Sachs, who might be driven to excessive exuberance by the size of their bonuses: “We remain convinced that the worst of the recession is behind us. The global economy has steadied itself and the current recovery is sustainable. While there certainly are some threats to the recovery, we assign a low probability to any one of them derailing US growth.”
Even the gloomier bunch at Coutts, who believe the global recovery remains fragile, admit that “the financial climate has improved markedly”. As indeed it has: dollar-denominated corporate bonds worth more than $1 trillion have been sold this year, a record.
Retail sales are showing some strength and although sales of new homes fell last month, inventories of unsold homes are well below their peak and sales of existing homes are up, as are prices. And an increasing amount of corporate news is quite good: IBM is so confident that business is picking up that it is stepping up purchases of its own shares; Verizon Wireless, in which Vodafone has a 45% stake, reports the highest increase in its customer base since 2005; and — most important — Caterpillar, the world’s largest maker of construction equipment, is signalling a revival of the manufacturing and construction sectors by rehiring some of the 34,000 workers it laid off.
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 opinion polls. Company executives know that the profits picture is improving but they worry that much of the improvement comes from cost cutting rather than increased demand.
They are fearful that a new banking crisis will emerge. They see an administration and a Congress that are spending America into such deep debt that the dollar will continue to decline, forcing the Fed to raise interest rates to prevent a collapse of the currency.
Some executives expect the price of gold to double or triple in the next five years, interest rates to climb from their current level of close to zero to perhaps 8%, and taxes to soar to bring the deficit under control. They also believe President Barack Obama has no use for a market economy, preferring instead to turn over the management of the country to a series of “czars” who set bankers’ compensation, run the domestic automobile industry, will take over the healthcare sector, and now issue some 85% of the nation’s mortgages.
Small-business owners are more concerned about the administration’s emerging $1 trillion healthcare plan, which will drive up their costs, and with the new taxes that are aimed squarely at the income groups into which owners of small firms generally fall. So they won’t expand or hire.
Which is why the White House is so unhappy. The only indicator that matters to the president is jobs, jobs, jobs, about which he quizzes his staff every day. That’s another way of saying votes, votes, votes. The latest polls show that the portion of Americans approving Obama’s handling of the economy has dropped from 58% to 50% in the past six months, approval of his handling of the deficit is down from 49% to 40% and that 67% believe it is “not possible” that his healthcare plan will not add to the deficit. Nevertheless, the president remains personally popular. He would like to keep it that way and is considering a programme that would give tax credits to employers who add to their workforces.
Consumers are the third unhappy group, completing the gloomy business-political-consumer troika. Consumer confidence fell in October for the second consecutive month, no surprise given the weakness of the job market, and the reasonable fear of the vast majority of Americans who are satisfied with their healthcare insurance that the Obama plan will reduce their benefits and raise their premiums.
What is one to make of all of this? Last quarter’s return to growth should be sustainable in the near and even the medium term. Inventory building, increased exports resulting from the declining dollar, stimulus money that is only starting to hit the economy, and other spending created by a Congress eyeing 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 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 who will have to pay the bills Obama will leave in his wake.
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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