Not Bad for a Bad Year

Some people will look back on the year about to end with anger, or at least regret. Merger makers who found a redundancy notice rather than a six-figure bonus check in their pay envelopes learned that they are no longer masters of the universe. Apparel retailers who hoped consumers would respond enthusiastically to bargain offerings are having to settle for the smallest gains in thirty years. Investors who thought that the fall in share prices had come to an end early in the year were sorely disappointed when prices fell another 25 percent. The two-in-one-hundred workers who were added to the unemployment rolls, bringing the total jobless rate to 6 percent, must find little comfort in the historical data that show that they will not be out of work for very long. And the handful of executives who found themselves doing “the perp walk” before television cameras will certainly remember this year as the low point in their once high-flying careers.

Speaking of flying, 2002 may turn out to be the year in which the $300,000-per-year pilots of United Airlines, accustomed to a work schedule that permits them to run businesses on the side, came down to earth. With the bankruptcy court empowered to void any labor contracts that prevents the carrier’s return to profitable operation, pilots might just find that the stranglehold they have had on the industry was broken this year.

But not everyone will look back on 2002 as an annus horribilis. Investment bankers in the fixed income and derivatives ends of the business will be shopping for Porsches and the new status symbol, the Rambo-style Hummer. Lawyers feeding on the Enron carcass in bankruptcy court, having run up $300 million in bills, a rate of about $1 million per day, have no complaints about how fate has treated them in 2002.

Citigroup’s Sandy Weill will have to be sighing with relief at the fact that at year’s end his wrist received the mildest of slaps rather than handcuffs, as New York attorney general Eliot Spitzer came to realize that it would be difficult for him to run a successful race for governor in the face of significant hostility from the Wall Street community. The $400 million fine levied on the world’s largest bank comes to a tiny fraction of its approximate $15 billion in earnings.

More important for the financial sector, it dodged the bullet of structural reforms, and instead supplemented the modest fines levied on it with promises to build less porous Chinese walls in the future, and to fund some research by firms that are supposed to remain independent of the investment banks that will be their paymasters. Only the dimmest of bankers will fail to understand that 2002 was a fraught year that ended on a high note for them.

Perhaps the most important development in the U.S. economy in 2002 was a demonstration of its enormous resiliency. Most of the world’s economies proved to be so poorly managed that they could contribute nothing to worldwide economic growth, leaving to America, itself adjusting to the bursting of a share price bubble, the role of economic locomotive. Which role it performed rather well, in spite of the fact that Americans realized that they now live under threat from Islamic terrorists whose aim is to bring down the home of capitalism and individualism.

Worldwide slowdown, stock market gyrations, and the War on Terrorism notwithstanding, Americans went about the twin chores of preparing further assaults on their enemies and carrying on with their lives. Workplace efficiency rose at a rapid rate, contributing to rising unemployment now, but to greater productivity and wealth in the longer term.

Inflation remained nil. House prices rose, partially offsetting the portfolio losses resulting from plummeting share prices. And at year’s end, 94 percent of Americans are employed, with most experiencing rising real incomes.

It may come as a surprise to devoted readers of the generally gloomy financial press that the American economy grew at an impressive rate in 2002. It added some $350 billion to the value of goods and services produced. That increment in U.S. GDP approximately equals the total output of India and of Australia; America increased its GDP by an amount equal to three Polish or Greek economies. This, in what everyone is writing off as a bad year for America.

None of this is to say that 2002 was a vintage year. No year in which preparations for war dominate the headlines is one to be looked back on with complete satisfaction. Americans worry about the price they will have to pay to remove the threat posed by Saddam Hussein, not only at the gasoline pump but in the battlefield. Economists worry that the level of consumer debt will bring spending to a grinding halt, that the decline experienced by the dollar in 2002 might turn from gentle to precipitous, that a protracted war will send oil prices soaring to recession-inducing levels, and that businessmen may continue to hold back on new investments in 2003.

The outlook for that new year is the subject of next week’s column. Meanwhile, to all those who have taken the time to read this column during 2002, a very happy new year.

This article appeared in London’s Sunday Times on December 30, 2002, and is reprinted with permission.