Party mood will keep good times rolling
January 4, 2000
by Irwin Stelzer
SUNDAY TIMES (LONDON)
January 2, 2000
THIS is the time of year when economists insist on making fools of themselves by pretending they can forecast the course of complicated economies, often down to the last decimal point. Of course, they cannot. Nor can journalists, witness this Washington Post headline of January 1, 1929: "Good Times are Predicted For 1929". Bankers have no better crystal balls. That same Washington Post contained this headline: "Capital City Will Enjoy Prosperity This Year ... Bankers Say".
There is more reason this year than ever before to take any forecasts with a ton of salt. The American economy is in the throes of structural changes the consequences of which cannot be predicted. The financial sector has been deregulated, unleashing competition between institutions previously confined to separate pigeonholes. Whether this will result in greater efficiency or a shakier financial system we do not yet know.
Productivity seems to be growing at a rate thought unattainable only a year ago, which makes it difficult to know the long-term effect of the current low unemployment rate on inflation. The Opec oil cartel has got its act together and once again is driving crude oil prices to levels far above those that would be set in a competitive market, with consequences almost impossible to determine.
And the rate of technological change, in fields as diverse as genetic engineering and telecomputing, is now so rapid anyone brave enough to forecast its consequences had better be prepared to issue frequent updates and revisions.
Add to these structural changes the performance of shares - or, more precisely, some shares; the great and chancy experiment with a new currency in Europe; an inability to know in which direction the Russian economy will lurch; and Japan's continued teetering between recession and recovery, and you have a forecaster's nightmare - or, to put a cheerier face on it, a host of excuses for when the year end and the forecaster has to face reality.
My own guess, based on anecdotal evidence, intuition and conversations with businessmen and advisers, is that, like 1999, 2000 will surprise on the upside. Consumers are in a buoyant mood. They trooped to the shops and malls during the Christmas season, and clicked away on their computers in a flurry that brought smiles to the faces of the most hardened retailers and e-tailers. Early evidence is that Christmas sales were up 8% on 1998. More important for any appraisal of the new year, consumer confidence is at its highest since 1968.
Consumers are not alone in their optimism. Corporate America also enters the new year in an upbeat mood. A survey by R&D magazine and Battelle Memorial Institute, a research house, shows that businesses are planning to lift research and development spending by almost 11%, with makers of computers, drugs, telecommunications equipment and semiconductors leading the way.
But before adopting "Let The Good Times Roll" as the theme song for 2000, consider the warnings from the economists who surround George W Bush. They think both consumers and businesses are over-extended, and sometime soon - nobody is foolish enough to say just when - the bills will come due. Unable to extend their credit lines, consumers and businesses will have to cut spending, producing at least a mild recession. So the tune they are humming is "The Party's Over".
And one cannot blame them for hoping the end comes before November's presidential election, depriving Al Gore of his claim that he not only invented the internet, but, perhaps with some help from Bill Clinton and Alan Greenspan, crafted the policies responsible for the boom.
My own guess is that if Bush, or any other Republican, is waiting for a downturn to assure his election, he might as well wait for Godot.
The economy is more likely to grow at over 4% than it is to turn down - even if the stock-market "bubble" bursts.
Consider this. Two-thirds of shares on the New York Stock Exchange and Nasdaq are down 20% from their peaks. We have been witnessing what John Makin, the Caxton Corporation economist, calls a "process whereby the leadership in stock markets becomes narrower and narrower as a smaller and smaller subset of stocks rises faster and faster". If this high-tech bubble bursts, it would leave the majority of shares and the majority of investors - those who did not get cut in on the flotations that dominate the headlines - unscathed.
Besides, investors seem more tolerant of risk than in the past and need some means of investing to augment or replace the state pensions many baby boomers are no longer certain will be waiting for them when they decide to keep score on the golf course rather than on time sheets. So they are likely to continue investing in equities, satisfying themselves with single-digit long-term returns.
And yet, one cannot help being haunted by the words of the Jule Styne, Adolph Green, Betty Comden hit: The party's over, it's time to call it a day. They've burst your pretty balloon and taken the moon away. It's time to wind up the masquerade. Just make your mind up, the piper must be paid ... Now you must wake up, all dreams must end. It's all over my friend.
So sing the pessimists. As for me, I am inclined to think the good times will indeed continue to roll, even after Alan Greenspan raises interest rates next month.
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.