The economy is a funny thing
11/30/2001 12:00:00 AM - George Will
WASHINGTON--The official certifiers have certified that since March the economy, after a 10-year expansion, the longest in U.S. history, has been in a recession, the 10th since 1945. So let us relearn the two laws that make economic news intelligible.
Law One: All news is economic news. Law Two: All economic news is bad news.
Terrorists attack. U.S. forces advance. Katie Couric is in love. Or not. All this is economic news? Indeed. Consumer spending is three-quarters of all economic activity, so anything that affects their sense of well-being is economic news.
The prices of gasoline and heating oil are down about 25 percent from this point last year. The average price of a gallon of gas ($1.12) is less than what it was in 1985. The decline of energy prices is the stimulative equivalent of a $100-billion tax cut. But is it good news? Yes, but it contributes to what appears to be bad news: Gas and heating oil sales are factored into calculations of retail sales and hence helped produce the news that retail sales figures, aside from those for automobiles, seem weak.
But surely surging auto sales are good news? Up to a point.
Just eight days after the terrorist attacks, General Motors launched zero percent financing. Other automakers followed, more vehicles were sold in October than in any month ever and 2001 may be the second- or third-best sales year in Detroit's history. How can this be bad news? Here is how.
The financing effectively meant a 4.7 percent drop in the prices manufacturers were charging for cars, so profit margins are now minuscule. Furthermore, what an analyst calls ``profitless prosperity'' is cannibalizing future sales, which probably will plummet when normal financing resumes. See? Record sales can be seen as depressing news.
But every sign of economic anemia (this may be advertising's worst year since 1938) can be matched by a sign of vitality (Internet traffic quadrupled between 2000 and 2001). And the real economic story is the economy's resilience. Consider:
Since the bursting of the tech bubble in March 2000, when the stock market swiftly shed $5 trillion in value--more than the GDPs of Britain, France and Italy combined--employers have pruned 900,000 jobs. Then terrorism provoked an immediate loss of another $1.4 trillion. Even after all this, the recession is amazingly mild.
The portion of September after the attacks constituted 22 percent of the third quarter, yet in that quarter GDP was down just 0.4 percent. And one estimate is that the economy will shrink just 0.8 percent in the fourth quarter. The number of workers filing for new unemployment benefits recently declined for four consecutive weeks.
Alan Abelson of Barron's reports that consumer installment debt as a percentage of personal income is 21 percent, near the record high and substantially higher than what is normal (under 16 percent) at the bottom of recessions. While that will limit the boost consumers can give to the recovery, the values of most families' most valuable assets, their homes, are still rising. That should help consumers feel good.
So would rising stock portfolios. As recently as 1990 individuals had only 22 percent of their assets in the stock market. Today they have almost 50 percent. This reflects the recent flood of assets into equity mutual funds that crested in 2000 with investors putting a net $305 billion into such funds. This year they have put in just $12 billion.
Perhaps they are tired of turbulence, something completely new to the tens of millions of Americans who did not start investing in the stock market until after the convulsion of 1987. But the rapidity with which the market climbed back to its Sept. 10 level indicates that investors are not so risk-averse that the market, which partly reflects and partly determines the nation's sense of well-being, must stagnate.
Finally, it is wonderful to hear worries about deflation. Not that deflation--a protracted general decline in prices--is desirable. But just 20 years ago the fear was that inflation would always be the systemic disease of democracy--that democracies, by fiscal profligacy and monetary policies determined by the public's low pain threshold, could not help but ignite inflation and could not stomach the measures to extinguish it.
Well, Barron's Randall Forsyth noticed that in the eventful month of September 2001, little attention was given to the retirement of some Treasury bonds issued in 1981. Because of high inflation then, and expectations of more, those bonds carried the highest interest rate the government ever paid on long-term borrowing--15 3/4 percent. The fact that we have nothing like that today refutes Law Two.