Economic Outlook Is Rosier Than Our Politicians Let On

When the Iraq war began to roil in March, the economic seers threw up their hands. Uncertainty over the war was freezing the economy; people were too preoccupied to buy, firms too hesitant to invest. Call us, they said, when the war is over.

Well, the war is over, and the mood in the economy is undeniably sour. Data for April reveal that half a million jobs have been lost in the last three months, and the unemployment rate has grown to 6%. Is this where we’re headed -- into a new, second recession, or as economists call it, a “double dip”? In short, no.

Part of the reason we’re so fixated on the recent bad news is that both sides of the political divide are making hay by talking the economy down.

President Bush and his Republican supporters see slow growth as a rationale for their ongoing fixation with cutting taxes. And his opponents are engaged in some high-end hand-wringing as well, hoping that the economy will bring down this President Bush as it did the last one.

But the further you pull back from the recent jobs data, the better the economy looks.

First, job growth is more a measure of what has just happened to the economy than what is about to happen.

Jobs will come about when there’s something for people to do and it’s profitable for them to do it. And that’s what’s starting to happen; customers are ordering more goods than factories are producing and the sales of goods are outstripping inventories. In all, the picture for production is getting better, not worse.

Part of the reason jobs have not been growing is that productivity continues to grow at a surprisingly strong rate. That’s small consolation for the unemployed, but it conveys some good news.

Strong productivity gives employers room to pay workers more, even if jobs growth is stagnant or declining. For all the talk of joblessness, average hourly earnings are still more than 3% higher than they were a year ago. And rising productivity means that businesses have reduced their costs amid the wreckage of the bubble economy and have cleared the decks for a new round of expansion.

In fact, far from needing stimulus, the economy already has plenty. Oil prices are falling and oil production from an occupied Iraq threatens to flood the market. The federal government is pouring money into the economy as if there’s no tomorrow; this year’s fiscal deficit is a colossal $600 billion larger than we expected it to be only two years ago. Interest rates are as low as they’ve been in a lifetime and will stay that way for the indefinite future, allowing businesses and families to refinance their debts. Consumer confidence has already rebounded sharply since the shooting in Iraq stopped.

So, far from a double dip, the economy might well start to grow faster late this year -- certainly not at the herculean rates of the 1990s, but substantially nonetheless. And once it begins to grow, wages will continue to rise, profits will improve and jobs will inevitably follow.

Alan Greenspan and the Fed get it. When the chairman of the Federal Reserve and his board of governors most recently commented about the economy, they did not admit to a substantial fear of slowing growth, although they made clear their willingness to respond if growth did slow. Instead, their predominant concern was deflation -- falling prices. And prices are falling because productivity is high, oil costs are low, technology is abundant and China and other producers are flooding the world with cheap, low-end manufactured goods.

If our biggest economic problem is falling prices, we’re in pretty good shape.

This rosy scenario doesn’t mean that we can walk away from our obligations to the jobless. But there’s a difference between that kind of support and tax or spending plans that would leave our children with a spiraling legacy of unpaid bills. Look at it this way -- if politicians of every stripe are talking down the economy, isn’t imminent growth a good bet?