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Monday, December 16, 2002
Larry Kudlow :: Townhall.com Columnist
Shop till you drop
by Larry Kudlow
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The 8 zillion media talking heads who expected a total-dud holiday retail season are dead wrong. Adjusted for the zigs and zags of auto-loan incentives, core retail sales in November showed a handsome 5 percent annual rate of increase over the past three months. Americans used gobs of cash from newly refinanced home mortgages to buy various home-improvement building materials and furniture. They went shopping at all the big general-merchandise stores to purchase toys and high-tech gadgets like DVDs, MP3 players, Blackberries, Palm Pilots, cell phones and the usual mind-numbing video games that overly permissive parents distribute to their poorly dressed deadhead kids. Meanwhile, all those upwardly mobile moms and dads who wish to be better dressed than their deadhead kids have been buying apparel and furnishings at a 6 percent annual rate over the past three months. What's more, as all the top-line department stores make final discount price cuts before Christmas, the great American middle class will soon be shopping its head off at Bergdorf's, Saks, Neiman Marcus, Bloomingdale's and Barneys. Before the season's over, this prosperous wave of middle-class holiday shopping will even reach the real high-end shops like Polo Ralph Lauren, Paul Stuart, and Turnbull and Asser. Yet despite (ITAL) all this, the economic talking heads are still pessimistic. Why? Well, pessimism has won out over the last few years, and it's still very fashionable. The pessimism stems from what economists call adaptive expectations, a stupid theory that drives most econometric computer models. It assumes that what happened in the past will continue to happen in the future. In other words, the best way to forecast tomorrow is to look at yesterday. The more you think about that theory, the stupider it becomes. In the 1970s, a smart guy named Robert Lucas, who teaches at the University of Chicago, came up with a much better idea. He called it rational expectations, meaning an ordinary individual is much smarter than your garden-variety run-of-the-mill economist. In real life, people gauge the future by looking at current events, especially events that might in some fashion change trends by making the future different from the past. Government policy announcements, for example, would qualify. Raging inflation from too much easy money and a cheap dollar in the 1970s led economists to believe that inflation would rage for another hundred years. But policy changed in the 1980s in a way that limited money creation and strengthened the dollar. For the next 20 years, inflation evaporated, interest rates plunged, and stocks and bonds soared in value. So, when good policy replaced bad, things changed for the better. Yet back then, just like today, the pessimists were stuck looking in the rear-view mirror and couldn't see the prosperity wave coming. Other events that color Main Street ideas about the future include changing tax rates, business regulations, international events like wars and tariffs, corporate embezzlement and accounting fraud, bankruptcies, and transit-union strikes. Consumers and investors use these events to guide their decisions about spending and investing. Looking at it in this light, rising incomes, low interest rates to refinance mortgages, statements by the Fed that it will continue to feed the economy with new cash and confirmations by President Bush that taxes are going to fall again in the new year are all confidence-building events that have consumers shopping this holiday season. Ninety-four percent of the workforce today is employed -- a historically high percentage. Adjusted for a couple of Bush tax cuts and minimal inflation, real spendable incomes are now rising at better than 3 percent. That's also a historically high pace. Simply put, this country is in a fine position to spend. Main Street folks are rational. They look at their own financial statements and job prospects in order to make decisions. They do not listen to goofy economists who look at yesterday in order to figure out tomorrow. Core retail sales for this holiday season look to rise by nearly 5 percent at an annual rate. That's a sizzling pace, and it would be retail's best showing in two years. And there's nothing wrong with this, of course. The freedom to shop until you drop, the liberty to give gifts to family members and friends, and the mobility to go anywhere at any time are things worth going to war for. Even the pessimists might agree that the world's remaining tyrannies must never be allowed to deny us our well-earned prosperous lifestyle.
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Lawrence Kudlow is host of CNBC's Kudlow & Company

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