Economists and Businessmen at Odds
August 20, 2002
by Irwin Stelzer
There are times when anecdote and informed, practical opinion has to be weighed alongside hard data. Anecdote number one: a recent dinner date in New York’s Greenwich Village at a restaurant that once treated requests for reservations with the sort of scorn only a French proprietor can manage. We booked our table the day before; lots of empty tables explained management’s new diner-friendly attitude.
Anecdote number two: Driving uptown, we passed one of the several “Papaya King” fast food establishments beloved of New Yorkers with a taste for fresh-squeezed fruit juice and succulent hot dogs. The sign in the window: “Recession Special—Save 70 cents.” A mere $2.45 gets you two hot dogs and a 14-ounce drink.
Then there are my friends who fear that the optimism of these columns will embarrass me, and soon. Opinion number one: Irving Harris, a wildly successful Chicago investor, entrepreneur and philanthropist, takes me to dinner in Aspen to remind me that the recovery following the 1932 bust was aborted before it truly took hold, that consumers have gone deeply into hock, that we may be witnessing a house-price “bubble,” and that even now shares remain priced very generously relative to earnings.
Opinion number two: Stephen Peck, a New York money manager who was among the first to predict the protracted Japanese recession, calls to point out that General Motors and several other companies have insufficient reserves to cover their pension obligations, and that credit spreads—the premium the best companies pay above the interest rate on government bonds—is widening, which might portend a credit squeeze. And a big-time New York CEO complains to me that the credit window at banks has already slammed shut on the fingers of most borrowers—not that most companies are minded to borrow just now.
Then there is the relentless parade of bad news, much of it in the largely liberal press eager to boost the Democrats’ chances in the November congressional elections. On a single day the New York Times greeted its readers with the following page-one headlines: “Stagnant Wages Pose Added Risks To Weak Economy”; “Decade After Health Care Crisis, Soaring Costs Bring New Strains”: “Latin Countries Chafe at Strings on IMF Help.”
Given this media drumbeat it should be no surprise that the portion of Americans who rate economic conditions either excellent or good is down from 67 percent to 28 percent since George W. Bush took office.
So we have anecdotal evidence that all is not well, investors worried about everything from over-stretched consumers to a credit crunch, and Americans less pleased with economic conditions than they were two years ago. Not to mention the uncertainties surrounding the war on terror, and disgust with what Federal Reserve Board chairman Alan Greenspan calls “infectious greed” on the part of corporate chieftains.
There is, of course, more than mere anecdote to support those who feel that Greenspan and his colleagues erred last week when they declined to lower interest rates again. Consumers’ enthusiasm for buying anything they can’t either live in, or drive, or eat in restaurants, seems to be waning. John Bucksbaum, CEO of General Growth Properties, a firm that owns or manages 163 regional malls that are homes to 15,000 retailers in 41 states, says that sales so far this year are down about 1.5 percent from last year on a comparable-stores basis.
Little wonder. Americans’ net worth has fallen by almost 20 percent, or some $35 trillion, which comes to about twenty times the market value of all the companies in the FTSE all-share index. This is already forcing consumers to save more and spend less “to reach their financial goals,” reports Goldman Sachs.
Yet economists remain relatively cheery. A new poll of 193 members of the National Association of Business Economists—not an Ivory Tower crowd—found that 69 percent rate the chance of a double-dip recession as less than 50/50, and 77 percent think that monetary policy “is right on target.” So confident are the economists that the economy is in good shape that 56 percent would prefer to see fiscal policy tightened over the next six months, and only 22 percent think that a more stimulative fiscal policy is needed to jump-start the economy.
The puzzling difference between the in-the-trenches businessmen and investors, and the economists can be traced to one major factor. Those on the financial firing line think that there is a definite feed-back loop between stock markets and the so-called “real economy.” They argue that just as the wealth effect led consumers to splurge and businesses to invest in what proved to be excess capacity when markets were soaring, recent sorrier performance will eventually force consumers to the sidelines, where businesses now are and will remain.
Economists, on the other hand, or at least many of them, say that consumers’ losses are in retirement accounts that they never counted on to support their current spending. They doubt that the negative wealth effect, if there is one, is a force powerful enough to offset the positive factors that they feel are more important than jiggles in share prices.
Unemployment remains low; industrial production has increased for seven consecutive months; inflation is non-existent, leaving the Fed plenty of room to cut interest rates if the economy fails to pick up steam in the next few months; the economy has grown on average in the past three quarters at the respectable annual rate of three percent; productivity continues to grow; and personal incomes are up.
I don’t mean to suggest that a uniformly gloomy bunch of practical businessmen is disagreeing with unanimously cheerful members of the economics profession. But by and large we have a choice between gloomy, savvy businessmen and investors who may be too focused on share prices to see what is going on in the real economy, and cheerier economists who might be so taken with their models and statistics as not to realize the practical consequences of a massive wipe-out in consumers’ wealth. Bush is hoping the economists have got it right.
This article appeared in London’s Sunday Times on August 18, 2002, and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.