At Last, Common Sense on the Economy

Diana West

6/20/2008 10:27:42 AM - Diana West

WASHINGTON -- An unlikely, man-bites-dog story recently appeared on the front page of one of our nation's most liberal newspapers, asserting that the U.S. economy is not as bad as people think.

The Washington Post, a left-leaning newspaper that persistently paints a gloomy picture of the country's economy, even before its descent into the subprime debacle, underwent a conversion of sorts last week. It decided to take a fresh look at the fundamentals of our economy and concluded that comparisons to past recessions and depressions were exaggerated, if not downright silly.

Readers of this column know that I have long railed against the gloom and doomers, while championing our economy's inexhaustible resilience, exuberance and competitive spirit, as well as its ability to recover against any and all challenges. That's why Washington Post reporter Neil Irwin's story last Wednesday came as a breath of fresh air. It's a gutsy, against-the-grain reexamination of the biggest election issue in the country that puts the numbers into a sharper and more honest context.

Under the headline, "Why We're Gloomier Than the Economy," Irwin ridicules the sky-is-falling view held by most Americans that the economy is "not just bad, it is run-for-the-hills terrible."

The polling numbers on consumer confidence are now the lowest in three decades. Gallup's surveys find that the number of Americans who think the economy is getting worse has risen to 87 percent. Liberal Democrats, Wall Street critics of the administration and economic bloggers on the Internet routinely make comparisons to that mammoth economic disaster of the 1930s, the Great Depression.

"But the reality is different. According to the most broad measures of how the economy is doing, it's not all that grim," Irwin states flatly. He's right. Yes, the economy is soft. Yes, the growth rate has slowed. Yes, the financial markets have been rattled by the housing and credit crunch, and the spike in oil and gas prices.

But with everything that has been thrown at it -- the subprime housing collapse, the subsequent credit crunch, skyrocketing oil prices and record fuel costs at the pump -- this economy is holding up much better than it has in previous recessions. Unemployment remains historically low by most measures (far below past recessions) and, all but overlooked by critics, the economy is still growing by nearly 1 percent in the first quarter. To make any serious comparisons with the Great Depression in the 1930s, when more than one-third of the workforce was unemployed and the economy was shrinking, is patently absurd.

As for any comparisons to recent recessions, one need go back to the spring of 1980 when Jimmy Carter's economy was heading south and the unemployment rate had risen to 7.5 percent and inflation was 14.4 percent. The national jobless rate today is 5.5 percent (between 4 percent and 5 percent in many states) and inflation is at 4.2 percent, with the core rate (minus volatile energy and food prices) at less than 2 percent.

The decline in housing values is perhaps the biggest culprit making Americans increasingly pessimistic about the economy. That has fed fear that as relative net worth has declined, so will overall consumer spending, which accounts for two-thirds of the economy. But it doesn't affect it at all, as Irwin aptly notes, citing a study by Wellesley College economist Karl E. Case, who compared spending habits with changes in housing values. Homeowners, feeling wealthier, will spend more as those values rise, but they don't spend less when they fall.

Wall Street economists David Malpass, is a realist with an optimistic outlook who sees economic problems ahead of us as well as, more importantly, opportunities for growth. He worries about inflation through 2009, even if the dollar rises. The impact of tax increases on labor, dividends, capital gains, inheritance and the alternative minimum tax that are due to expire in 2010 is a huge concern, too. Still, Malpass foresees "a reasonably solid global expansion in 2009," noting that the U.S. economy "has an underlying sturdiness" because it is "driven by small businesses and a flexible labor force.

He thinks "the current rebound will have legs and the heavy investments made globally in recent years will pay off." How much of a rebound? Expect 1 percent to 2 percent growth in the second quarter and 3 percent in the second half of the year.

But right now, Neil Irwin's excellent article notwithstanding, Americans remain as gloomy as ever. That mood is unlikely to change anytime soon as long as oil and gas prices keep rising and the Democrats continue to block GOP proposals to produce our way out of this mess. Obama-smitten Democrats still think that Americans are opposed to drilling for more oil in offshore fields and in wilderness areas and that they blame U.S. oil companies for higher gas prices.

But Americans know better. The latest Gallup poll finds that they support such drilling by 57 percent to 41 percent and those who blame big oil has plunged from 34 percent to 20 percent.