prices on the two coasts continue to rise. The spending boom is
still running at full tilt. American consumers are spending like
there is no tomorrow.
the good old days, economists would tell us that this is all wonderful.
It is a sign of increasing productivity, evidence of people’s confidence
in the future. That was then. This is now.
London Financial Times (May 10): Real Wages Fall at Fastest
Rate in 14 Years
author of the article, Christopher Swann, reports on a recent survey
of wages and prices. A nominal wage is what someone is paid in currency
terms. Real wages reflect what that income will purchase. If retail
prices are rising faster than nominal wages, the worker is being
squeezed. This is what is now happening.
rose 3.1 per cent in the year to March but salaries climbed just
2.4 per cent, according to the Employment Cost Index. In the final
three months of 2004, real wages fell by 0.9 per cent.
last time salaries fell this steeply was at the start of 1991,
when real wages declined by 1.1 per cent.
is worse than this, of course. In addition to being squeezed by
the rising cost of living, he is being squeezed by the income tax:
state (probably) and federal (surely).
economists believe that in spite of the unexpectedly large rise
in job creation of 274,000 in April, the uneven revival in the
labor market since the 2001 recession has made it hard for workers
to negotiate real improvements in living standards.
is this problem. The supposed
increase in the number of jobs is a guess made by the Bureau of
Labor Statistics. This guess is based on an imputed statistic
known as the birth-death ratio of businesses.
I have commented on this statistical legerdemain before. So
most significant factor in any recovery is employment by profit-seeking
businesses. Things are a lot worse than the government’s statistics
we are talking about employment generated by actual consumer demand,
the U.S. economy is in worse shape than it was four years ago.
after last month’s bumper gain in employment, there are 22,000
fewer private sector jobs than when the recession began in March
2001, a 0.02 per cent fall. At the same point in the recovery
from the recession of the early 1990s, private sector employment
was up 4.7 per cent.
LOVES AN ILLUSION
American consumer is no doubt optimistic. He continues to spend,
despite the fact that his real income is falling. He thinks, as
Mr. Micawber thought in Dickens’ David
Copperfield, that something will eventually turn up. But,
so far, nothing has . . . except prices.
begin to suspect that America’s consumers are modeling their expectations — great
expectations — after the more recent David Copperfield, who somehow
gets an attractive lady to float in mid-air.
Copperfield’s performances are good fun because they rest on illusion.
I keep wondering what the consumers’ optimism rests on. I keep wondering
what will happen when the applause ceases after the curtain has
American consumer, like Mr. Copperfield, has drawn a large and enthusiastic
audience: politicians, economists, economic forecasters, and foreign
investors. Everyone in the audience is amazed at what they see.
Instead of the old magician’s truck of pulling rabbits out of a
hat, the American consumer is stuffing rabbits into a hat.
in the audience is thinking: "How does he do that?"
he tells the crowd that he can do the same trick with anything the
audience has in their pockets. He calls on the audience for volunteers.
economists never do anything for free, so they just sit there.
politicians figure they are going to get a percentage of everything
that goes into the hat, so they just sit there.
forecasters, not having a dime in their pockets and not wanting
anyone in the hall to find out, just sit there.
foreign investors line up. They come on stage, and the consumer
gets them to put everything they have in their pockets onto a table.
Then, item by item, he stuffs everything on the table into his hat.
The volunteers all go back to their seats with empty pockets.
economists insist that it’s not a trick; it’s just Keynesianism
in operation at the micro level. It’s all quite productive.
politicians say it’s good for the economy as long as whatever is
in the hat is not assessed at the lower capital gains rates.
forecasters say that they see no reason why the show will not go
on indefinitely as long as enough foreign investors show up.
foreign investors think they will get their stuff back after the
show. "What good fun!"
curtain falls, the crowd goes home, and word spreads about the fabulous
rabbits-into-the-hat trick. Amazingly, even more foreign investors
show up the next night. Soon, the performer must rent a larger hall.
month later, on page 6 of the Wall Street Journal, there
is a brief story about the rising price of rabbits.
American economy is like the lady in the air. We all know the wires
are there. We just can’t see them. She won’t stay suspended after
the curtain falls.
there is no doubt about one fact: the levitating economy trick has
gone on a lot longer than the skeptics in the audience ever thought
some point, there is a tendency of the audience to conclude that
maybe, just maybe, there are no strings. Maybe, somehow, Mr. Copperfield
has found a way to overcome the law of gravity. The audience starts
filling up with true believers. Maybe it’s like flying saucers.
Maybe flying saucers are real. Maybe the government is suppressing
government’s official explanations of the causes of the recovering
economy look more and more like its reports on Roswell. There is
something else: the more that I listen to Alan Greenspan, the more
he sounds like a space alien. (He plans to leave soon. "A.G.
there no strings attached?
there are. They are supplied by lenders. Lenders are convinced that
the show will go on, that revenues will continue to flow, and the
economy will continue to be suspended safely at ever higher levels.
supply of strings seems secure, and every time this is called into
question by events, the Federal Reserve System turns on the string
are to the economy what investors are to a Broadway show. As long
as the audience fills up each night, the director can ask investors
for just a little more money, a little more time. Meanwhile, the
crowd standing in line is going to pay for its tickets with their
credit cards. More strings.
complexity of the web of debt is so great that no computer, no data-gathering
agency has the ability to track it. The derivatives market alone
is estimated to be in the range of $150 trillion.
consumers, and government regulators are all assuming the truth
of what the anti-market ideologues have denied from the beginning,
namely, that individuals can make self-interested decisions regarding
personal and corporate debt, and the economy will prosper. "Deficits
don’t matter" — not personal, not corporate, not government.
would agree with the defenders of debt, were it not for the fact
that central bankers, politicians, academic economists, and administrators
of government-guaranteed bank insurance programs have assured the
public that in case of a crisis, the government will bail out the
credit system to keep it open for business. The debt-ridden public
has believed this. Lenders have believed this. Investors have believed
is a movie scene that you should keep in mind whenever you read
that a government agency will keep the credit system afloat. In
"Superman," Lois Lane has just fallen off the roof. Superman
flies up, grabs her, and assures her, "Easy, miss. I’ve got
you." To which she replies, "You’ve got me? Who’s got
see the strings, but assume that these can be broken legally in
a pinch. Lenders extend the strings, but assume that someone, somehow
will grab hold of the strings if the existing debtors break them.
Everyone knows that if the system of strings ever breaks, the result
will be a catastrophe. Yet the intertwined system of strings looks
more like the Gordian knot these days than it looks like a stage
production of Peter Pan.
system holds. But most Americans today are falling behind. Price
inflation is now rising faster than wages are increasing. Add the
income tax effect, and the worker is falling behind steadily.
he spends. Lenders offer him money at rates that seem low, and he
takes it. Every time he does this, he places another restriction
on his economic mobility. He trusts the decision-makers to protect
him from rising interest rates, yet the Federal Reserve’s stated
policy today is to raise interest rates.
squeeze will continue unless the rate of price inflation falls.
But if it does fall, then it is likely to take the economic recovery
with it. With respect to private sector employment, it is not much
of a recovery.
best investment strategy today is this one: "No strings attached."
There may be exceptions, such as a fixed interest 30-year mortgage
on a house that would easily rent for more than you are paying for
mortgage, maintenance, and insurance. But there are not many of
these for sale these days.