At some point over the last seven years, you have probably heard someone—a friend, a business executive, the president of the US—say that the 11 September attacks sent the American economy into a slump.
It’s an understandable enough notion, given that the attacks occurred in 2001 and a recession began that same year.
But it’s simply incorrect. The economy started shrinking in March 2001, largely because of the hangover from the technology bust.
The attacks did cause a sharp drop in the stock market, but if you were to go back and look at, say, the quarterly numbers on consumer spending, you wouldn’t even know a major event had happened in September. By November, the economy was growing again.
The current downturn—and I’d say the odds that it’s a true recession are about 75%—has not one dominant mythology. Instead, there are several different myths starting to make the rounds. Just like the one about 11 September, they tend to make the economy’s problems sound simpler than they really are.
Today’s column will be my last until early September. I’m going to finish working on a couple of projects and then take paternity leave. Before heading off, I wanted to take a stab at predicting which economic fictions are likely to get the most air time over the rest of the summer.
Forecasting may be a fool’s game, but, to steal a line from William Safire, “If you don’t play, you can’t win.” So, here goes.
Eyes glued: Traders work on the floor of the New York Stock Exchange on Tuesday. (AP)
On Thursday morning, the labour department will release the latest jobs report, which is typically the most telling economic indicator. It covers the entire economy and gives a sense of how families are being affected by it. This week, economists are expecting yet another bad report, with a sixth straight month of job losses.
But whatever the report shows, the job market is likely to remain weak through the end of the year, because employment generally continues to fall for months after a downturn has ended. That means we are soon going to start hearing a lot about layoffs. Big layoff announcements will be treated as a symbol of all that’s supposedly wrong with the economy.
Strangely enough, though, layoffs have very little to do with the economy’s problems. Since 1992, the labour department has been tracking something called “gross job losses”, which is the number of positions eliminated at a given office or job site. In 2007, these losses were at nearly their lowest point on record, just above the 2006 level. That’s right. Last year, companies eliminated significantly fewer jobs than they did in any year of the fabulous late 1990s boom.
Unfortunately, gross job gains—the new jobs created— have fallen more sharply than job losses. Companies have gone on a hiring strike, says Ed McKelvey, a Goldman Sachs economist.
Existing firms aren’t expanding much, and not enough new firms are starting. The country is suffering from an innovation deficit.
Layoffs are certainly likely to increase in the coming months, and the pain, both financial and psychological, that comes with any individual layoff tends to be severe.
The victims of these layoffs deserve help, in the form of extended unemployment benefits. But the long-term solution can’t revolve around efforts to slow globalization, technological change and other forms of economic churn. We need more churn, not less.
If you want to understand the causes of the innovation deficit, I’d recommend you add one serious book to your summer reading list: The Race Between Education and Technology by Claudia Goldin and Lawrence Katz, two labour economists.
They argue that the American prosperity of the 20th century sprang largely from the country’s longtime lead in educational attainment, a lead that has all but vanished today. Future prosperity won’t be based on saving yesterday’s high-wage jobs, as Katz told me. It has to start with smarter, more strategic investments in education, physical infrastructure and other things that can create the high-wage jobs of tomorrow.
The second big myth is the one that has been occupying Congress—the idea that the spike in oil prices is a big mystery that can be explained only by market manipulation. Other writers have done a nice job of debunking the manipulation argument. I’ll stick to the reasons why the run-up, abrupt as it may feel, isn’t mysterious.
The world is now at the end of a 20-year energy cycle. From the mid-1980s to the middle of this decade, oil prices fell even as the world economy grew. A barrel of crude cost $68 (Rs2,944 today) in 1983 (adjusted for inflation)—and just $33 in 2003.
How did this happen? The high prices of the early 1980s gave producers an incentive to take more oil out of the ground and also gave consumers reason to use less of it. With supply growing quickly and demand growing less quickly, prices plummeted.
The low prices of the 1990s reversed those incentives. Americans fell in love with Hummers and pick-up trucks, and the Chinese and Indian booms were fuelled by cheap energy. Oil supplies, meanwhile, weren’t growing so quickly. To top it off, the decline of the dollar since 2001 has reduced Americans’ purchasing power. Without that decline, a barrel of oil would cost less than $110 today, rather than nearly $141, according to Stephen P.A. Brown at the Federal Reserve Bank of Dallas.
Oil prices may well fall at some point. But no speculation-hating senator can legislate oil back to $26 a barrel. It will stay expensive until the fundamentals—supply and (more important, for the sake of the planet) demand—change.
Another cycle that still has a way to go is the housing bust. Prices have fallen by more than 20% in some cities, which has made renters (like me) more willing to buy again. These price declines have also led some experts to start proclaiming that the real estate market is close to the bottom.
It isn’t. By any measure— prices relative to incomes, prices relative to rents, the number of homes languishing on the market—houses are still overvalued.
Come Labour Day, prices will still be falling. In some places, they’ll still be falling by Labour Day 2009.
The common thread in these myths is that they all serve to minimize the scope of the economy’s weakness. They make it as sound as if the problems are acute—job cuts, oil speculation, a little real-estate overexuberance—rather than fundamental.
Which brings me to the final myth. Pundits have been scratching their heads lately about why the public mood is so grim. Last week, Barron’s called the drop in consumer confidence “difficult to figure”. A front-page headline in The Washington Post claimed, “We’re Gloomier Than the Economy.”
But are we really?
For the first time on record, an economic expansion seems to have just ended without most families having received a raise. For the first time on record, the typical home price nationwide is falling. The inflation-adjusted value of the Standard and Poor’s 500-stock index has dropped 20% in the last year, and 30% since its peak in 2000.
I think the public has called this issue exactly right: The American economy has some real problems. Even if this summer’s downturn turns out to be mild, those problems aren’t mild—or simple—and they aren’t going away anytime soon. It’s going to take some real work.
See you in September.
©2008/ The New York Times
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