We Americans can now fill the capacious tanks of our 4x4s at almost half the price that prevailed a few months ago. The interest rate on mortgages is lower than it has been in almost four decades, so applications are soaring to levels not seen in five years. The unemployment rate is 6.7%, not bad by historic standards. Consumers who benefited from substantial pre-Christmas discounts — 65% off cashmere sweaters at swanky Neiman Marcus — are finding even bigger post-Christmas bargains. We once had to shell out $2 to buy £1 and about $1.60 to purchase a single euro. Now we can buy the pound for less than $1.50 and the euro for $1.40. A new, dynamic, and best of all, black, president is about to move into the White House, bring the troops home from Iraq, give some 150m Americans a tax cut, and restore America’s prestige in the world. So Americans must be of good cheer as we prepare to celebrate the new year.
Hardly. Year-end tidings are definitely not of comfort and joy. Yes, petrol is cheaper, but who is in the mood for a car trip when the economy is in a very different tank, to use the vernacular for recession? Yes, the unemployment rate is relatively low, but that is because millions have dropped out of the labour market after unsuccessfully searching for work, and others have been forced to accept part-time work when they could not find a full-time job. Add those to the workers classified by the Department of Labor as unemployed, and the rate doubles to over 12%. And that doesn’t count those working shorter weeks or taking pay cuts.
Yes, mortgage rates are low, about 5% for the traditional 30-year fixed-rate mortgage. But almost nobody can get one, as the banks hoard money and do business only with the least risky applicants, or find that they have laid off so many staff that they don’t have enough workers to process applications. Besides, with prices falling faster than at any time since the Great Depression, who wants to buy a house now when it might be available at a lower price in a few months? Most of the mortgage applications are aimed at refinancing existing mortgages at the new lower rates, so the inventory of unsold homes remains at about twice normal levels, and half of the homes that do sell are going for prices that don’t cover the outstanding mortgage.
Yes, an overseas holiday would cost less than only a short while ago, but who wants to spend money on a trip to some resort where he might end up the target of Muslim fanatics, or when his job might disappear while he is strolling through the National Gallery or the Louvre?
And yes, shares are at bargain prices. But will they be cheaper tomorrow? The Wall Street Journal reports that between 2002 and 2005, investors put an average of $62 billion a year into stock mutual funds (unit trusts), before getting nervous and pulling out about $40 billion a year. Well, in October nervousness turned to panic, or resignation, and investors pulled a record $72 billion from such funds. And that was before Bernie Madoff’s $50 billion heist became public knowledge. Some put the money in short-term Treasury bills that yield no interest. One wag says that the way to diversify is to put some of your money under your mattress, some under your wife’s, and some under your children’s.
Adding to Americans’ sense of confusion is the gap between what we see and what we are told. The government says the cost of living is falling, with the prices of food, housing, clothes, cars and oil dropping. Meanwhile, pensioners see the costs of medical care and prescription drugs soaring, and consumers claim that they get less for their money at the supermarket, either because prices have risen, or because package sizes have shrunk. So do they believe what they are being told by the statisticians at the Department of Labor and by Federal Reserve Board chairman Ben Bernanke as he pumps cash into the economy to avoid the dreaded deflationary spiral that he sees on the horizon, or what they see on the price tags in the supermarket and at the chemist?
Fortunately, history suggests that this gloom and confusion shall pass. At the end of the second world war economists were predicting a resumption of the Great Depression: it didn’t happen. Indeed, then as after every recession since, the resilient American economy resumed its growth. Living standards rose; poverty fell; America’s energy-intensive, mechanised agriculture became the breadbasket of the world; the universities overflowed with students optimistic about their futures; the size of houses grew; household drudgery was replaced by energy-driven appliances that liberated women to enter the workforce; personal mobility rose as the real cost of cars fell; longevity increased.
There’s more, but you get the idea. America is endowed with ample natural resources to sustain rapid rates of growth. It is blessed with an entrepreneurial spirit that has produced successive waves of the creative destruction that allow the economy to shed the old and move on to the new.
Its policymakers, far from perfect, have never gone so far as to stamp out risk-taking, initiative and the incentive to work hard while reforming the capitalist system.
Most of all, our political institutions have been robust enough to survive wars and bitter political differences — difficulties such as we faced in the close-run 2000 election. If you doubt that, consider the civility and efficiency with which the current transition from a right-wing president to his left-wing successor is being conducted. Four American presidents, from both parties, will dine at the White House at the invitation of President George Bush, to share their experiences with Barack Obama and to pledge their support should it be needed in a crisis.
This might not be the merriest of Christmas seasons, and for many it is probably one of the harshest in living memory. But the new year is upon us, and the important question now is what it has in store. More on that next week.
- Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
SOURCE: The Times