Optimism And The Economy

The cupboard where democrats store their adjectives must be nearly bare. "Tragic, deplorable, abysmal" and "atrocious" is Senate Majority Leader Tom Daschle's description of the economy. "Stumbling, staggering, faltering," says Nevada's Sen. Harry Reid, who plays Sancho Panza to Daschle's Don Quixote--Reid is majority whip. But there is something Quixotic about their effort to make the economy, rather than war, the focus of this election season.

Last week Al Gore, whose words are coy but whose behavior is not regarding his quest for the Democrats' presidential nomination, gave a speech criticizing President Bush's economic policy. But Gore's speech was eclipsed hours later when Bush, standing with House Minority Leader Dick Gephardt and Sen. Joe Lieberman, Gore's 2000 running mate, likely rivals of Gore for the nomination, announced a bipartisan resolution about the use of force against Iraq.

Gore said Bush's economic policy is ruinous. However, the essence of that policy is the 10-year, $1.35 trillion tax cut, and Gore conspicuously did not advocate repeal of the cuts. Anyway, it is odd to ascribe economic difficulties to tax cuts, more than 91 percent of which have not yet occurred.

Candidates discussing economics are not under oath, so it was not amazing in 1992 that candidate Bill Clinton (who later would palter with the truth when under oath) said economic conditions were awful. Actually, the economy grew for six consecutive quarters leading up to the election.

In 2000 Gore said that in 1992 America was in "the worst recession since the 1930s." Actually, the recession had ended in March 1991 and had been the second mildest since the Second World War. The recession that the economy recently passed through was the mildest since that war.

There are two general problems with economic pessimism in America: in the long run it is always wrong; in the short run it can be self-fulfilling. Today there is a third particular problem with pessimism: it disregards too many facts.

It also emphasizes the wrong facts, such as the stock market. The market's gyrations have been unprecedented. Over the last two weeks there were a record eight straight days of triple-digit fluctuations in the Dow average, and five of them were declines. But remember the old joke: the stock market has predicted nine of the last five recessions. Remember also that the market experienced severe turbulence in 1987 (a 23 percent Dow decline in one day) and in 1998 without causing or foreshadowing a recession.

And especially remember this: last week the Dow closed at 7528--more than eight times the 884 that the Dow averaged in 1982. And in 1965 the Dow averaged 910. That is right: there were 17 years of market doldrums. At 7528, the market has fallen all the way back to the level of... 1998, which people then considered salad days, and grass certainly was not growing in the streets of America's cities.

In the last 31 months $8 trillion in wealth--more than the combined GDPs of Germany, India, France, Britain and Italy--has disappeared. The biggest speculative bubble in U.S. history has burst. The plunge in share prices has been the worst since the Depression. And revelations of corporate misgovernance have multiplied.

Yet this year's first-quarter growth was a robust 5 percent, in the second quarter consumers' real disposable income rose a healthy 3. 6 percent and many forecasters expect the year's growth of the economy to be 3 percent. Productivity continues to rise, meaning more goods and services are produced by fewer resources. And because the deregulated economy is so competitive, lower unit costs are being passed on to the consumers, who hold the whip hand.

Last October--the first month after the terrorist attacks--was the best sales month in the history of the U.S. automobile industry because of the companies' quick resort to zero percent financing. Americans consider such financing pleasant, and consider every pleasure an entitlement. Detroit will have a difficult time withdrawing interest-free purchasing.

The average interest rate on 30-year fixed-rate mortgages--5.84 percent--is at a record low. That helps explain why more than three quarters of all mortgage applications are for refinancing, which is akin to a do-it-yourself tax cut by consumers, who increase their ability to consume.

Two of the economy's three propellants--government spending and consumer spending--are increasing. The third, business spending, will not lag forever. Businesses are bidding up the price of television advertising. And unemployment declined last month.

A majority of Americans participate in equities markets. Forty percent of those old enough to trade stocks had never known a queasiness-inducing market until the July slide. Would turbulence trigger panic? In July investors withdrew $52.6 billion from stock funds. But that was just 1.7 percent of those funds. So 98.3 percent stayed put. Wisely.