The Upside of the Downturn
There are good reasons why consumers keep spending
September 11, 2001
by Irwin Stelzer
EVERYONE WHO WATCHES the financial news channels and reads the generally depressing economy stories in the daily press knows one thing: Trillions of dollars of wealth have been destroyed as the stock market continues its descent from the stratosphere. What they can't figure out is why American consumers haven't abandoned the shopping malls in order to have more time to compute the exact losses they have suffered in their 401(k) and other accounts. Easy. Americans know a gamble when they see one. And they gambled on becoming very rich very quick. Many lost their bets. But instead of whining, they have shrugged and gone about their two businesses -- working and spending. This is not irrational denial of reality. Rather, in part at least, it reflects the fact that wealth destruction has been accompanied by a less easily observed phenomenon -- wealth redistribution. In short, the plunge in the Dow and the Nasdaq has created some real winners.
Start with the two-thirds of Americans who own their homes. The new census data show that the median value of single-family, owner-occupied homes rose from $ 79,100 in 1990 to $ 120,162 in 2000, a nice increase of over 50 percent. The National Association of Realtors, using a slightly different method, shows a similar result for a more recent period. In the second quarter of this year the median price of existing homes in 125 metropolitan areas rose by 6.4 percent ($ 9,400) over last year's levels, to $ 146,900. Although the figures are not strictly comparable, it is interesting to compare these increases in house values with the declines in the average value of 401(k) portfolios. Since 1999 the median value of those retirement accounts has fallen by $ 5,700 (from $ 47,000 to $ 41,300); in a roughly similar time period, the median value of existing homes has risen by $ 13,800.
No one thinks this torrid rate of increase in house prices can con-tinue, especially if the job market takes a turn for the worse. But neither does anyone think that house values will shrivel. It seems that falling share prices and a weakening economy have forced Alan Greenspan and his monetary policy colleagues at the Fed to lower interest rates. Lower interest rates make it cheaper to carry mortgages, in turn making it easier for buyers to bid up house prices. Wealth has shifted from shareowners to homeowners, as the Fed has fought to keep the economy on an even keel by lowering interest rates. And there are a lot more families for whom their home represents the biggest item on their balance sheets than there are folks whose wealth is pre-dominantly in shares.
Then there is the little-noticed transfer of wealth from capitalists to workers, if I may be permitted to use those old-fashioned designations. Daily there are reports from America's leading companies of profit targets missed or losses incurred. "Where did all the profits go?" asks a recent edition of Business Week. When oil prices were soaring, some of them went to the producers' cartel. But more went to American workers. New government data show virtually no growth in the profits of non-financial companies since 1995, if account is taken of the increase in payments to employees who exercised stock options when those options were still worth something.
What these revised data also show is that labor compensation has grown much faster than anyone realized. The Commerce Department now estimates that in the past three years the share of national income going to compensate workers has risen from 70 percent to 73 percent, while the share going to profits has fallen from 12 percent to 9 percent. That's pretty close to $ 250 billion going from dividend checks into paychecks. No wonder, then, that "house-hold demand has been sustained," as the Fed announced last week in the statement accompanying its latest rate cut, even as "business profits and capital spending con-tinue to weaken." Against the suffering of the corporate sector, and of those who profit from profits (including a lot of workers with profit-sharing plans and stocks) must be set the joy of workers who are watching their real incomes rise.
This shift in dollars from corporate bottom lines to workers' pay packets reflects the tight labor markets of recent years and, de-spite the headline layoffs now, the ongoing shortage of skilled workers. The unemployment rate for white collar workers is a mere 2.2 percent, and the Information Technology Association of America estimates that some 420,000 openings for program-mers, software engineers, and other high-tech workers will remain unfilled this year. Remember: Most high-tech workers are employed by non-high-tech firms, not the busted dot-coms and telecommunications companies about whose woes we read so much. Layoffs and increasing competition from immigrants may keep wages from rising at the unskilled end of the labor market, but increases at the upper end are likely to continue to outpace inflation -- unless, of course, the combination of the tax rebate now hitting consumers' mailboxes and the Fed's interest rate cuts fail to prevent a major recession.
Finally, bad news for producers is good news for consumers. Ford and GM are having trouble making money because competi-tion from foreign car makers is forcing them to offer huge discounts to move their metal off the showroom floors. Dell can't get into the black because its computers are selling for 20 percent less than they did at the beginning of the year. Intel is in trouble because its Pentium 4, 1.4 gigahertz processor now goes for about $ 180, compared with $ 574 on January 1. Small startups are finding that they can afford to rent office space in Silicon Valley, furnish it with swanky furniture bought for 25 cents on the dollar from failed dotcoms ($ 699 Aeron desk chairs -- a back-saving and prestige-enhancing feature of high-tech executive offices -- are in such plentiful supply that the Salvation Army won't pick any more up), and equip it with the necessary gear, still in original boxes, at 10 cents on the dollar.
And then we have the airlines. This is an industry that can't stand prosperity: As soon as it gets into the black, it shovels money to its pilots, to its customers, or to both. Only lowfare carriers such as Southwest seem capable of sustained prosperity. Right now, having given or offered their pilots huge wage increases, carriers such as United find themselves trying to fill empty seats by lowering fares, although it is difficult to say by how much. Nancy Paul, a top business getter with Executive Travel Associates in Washington, D.C., points out that the round trip fares of $ 296, $ 376, and $ 244 between Chicago and LaGuardia, Los Angeles, and Dulles reported recently in the New York Times vanished from sight within a relatively few days. But American Express Business Travel Monitor, which tracks fares on 215 frequently traveled domestic routes, says that airfares are now lower than at any time since 1954, and the industry's trade association reports that average fares are more than 8 percent lower than they were last year. No surprise, then, that the industry will lose $ 1.5 billion this year. That represents a transfer of real wealth from shareholders to workers and consumers.
None of this is to denigrate the role of profits in making the economy go. Without the prospect of a reasonable return, in-vestors will not make their capital available to entrepreneurs and to corporations. Which is what is happening in the high-tech industries right now. Sooner or later, no profits mean no investment and fewer jobs. But in the face of excess capacity in the high-tech and other industries, declining profits are the market's way of saying "no more." Which means that the ability of businesses to claim a larger and larger share of the nation's income for their bottom lines is over, at least for now. And that's no bad thing. Meanwhile, excess capacity and for-eign competition are forcing a transfer of wealth to consumers, and tight labor markets are forcing a transfer of wealth to work-ers.
If this trend doesn't go too far, and there is no reason to believe that it will, profits are likely to remain under pressure even as the economy recovers. But a growing economy with lower profits is not the end of the world. Keep that in mind when watching the depressed analysts on the financial news channels.
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.