So Arnold thinks that the economists
predicting rough times for our economy are not very manly.
Perhaps their thoughts were clouded by the over abundance
of testosterone emanating from the Republican Convention.
Television sets across the nation were on fire after the speeches
from Schwarzenegger, Giuliani, McCain and Zell Miller. Zell
Miller? Yes, that democrat in republican clothing with the
spitball message. Well, okay, we are concerned too about the
rising budget deficit and the escalating costs associated
with the war on terrorism. The economy also appears to be
slowing, and the recent left/right punches from Charley and
Frances will certainly not help. So we can continue to see
some short comings in economic data being released over the
next few months. The Fed next meets on interest rates September
21 and the upcoming economic data may inspire them to hold
rates steady until we get past this slow patch in the economic
recovery, but with the Fed one never knows. The consensus
seems to be for another quarter point rise.
It is well to remember that the Bush tax cut and the Fed’s
lowering of interest rates and increasing the money supply
prevented us from sliding into a much worse recession. There
were eerie similarities between the economic and stock market
booms of the 1920s and the 1990s. Margin requirements on stocks
in the 1920s were only 10%, and when the bubble burst, investors
were devastated. The Fed compounded things by choking off
the money supply, and the government made some blunders also
– namely the Smoot-Hawley Act. This time margin requirements
on stocks were 50%, and investors were once again hurt, but
not devastated. The Fed did its job with lower rates, an adequate
supply of money, and, of course, the administration chipped
in with tax relief. Second guessing is easy, especially when
things go wrong, but when you are in the decision making seat,
you do not have that advantage. So let’s not panic if
the economic recovery does not proceed at a record pace. There
will be setbacks, but the overall pace will be forward.
Another important factor to consider is that we are going
through a major transition in this country and around the
globe. We made a major transition in the late 19th century
and early 20th century, when we moved from an agrarian society
to a manufacturing society. We are now moving into the information
technology (IT) society. America since its founding has always
been at the forefront of these major transitions, and we will
lead this one also. Think IT and globalization. This transition
began subtly back in the 1960s and 70s with automation and
the rise economically of Japan. It continued with more suddenness
in the 1990s with high technology and the rise economically
of China and others. There is good news and bad news. The
bad news is that the rise in the production of manufactured
goods in China and elsewhere because of low wages and zero
benefits will continue to hurt our economy. The good news
is twofold. First, the lower cost of manufactured goods makes
them more affordable to all Americans and in that respect
raises our standard of living. Secondly, the rate of inflation
should remain low and in this respect we would not agree to
increases in interest rates being championed by the Fed. We
are hearing very little complaining about prices at the gas
pump as the lower cost of other goods has more than offset
gas price increases (which are now dropping).
This brings us to the employment picture. We do not think
either party understands the effects of IT and globalization.
One party can point to the slow growth of new jobs, and this
is somewhat true more because of IT driven productivity gains
than to out-sourcing (we in-source as many jobs). These numbers
do not include the thousands of people going into business
for themselves. Of course, the other party can point to this.
But, the bottom line is economic number crunching has not
come up with a responsible way to calculate either. Other
data does show that more Americans are drawing a paycheck
today in numbers greater than ever, and the unemployment rate
dropped again to 5.4%, historically a very low level. More
Americans own their home today than ever before. More people
have more money to spend and live a lot longer to spend it.
More people have a college degree today – 25% of those
over age 25 versus 8% in 1960, and it’s not just in
the USA. In 1970, 35% of the people in developing countries
were starving. The UN expects that rate to drop to 12% by
2010.
There is just too much dwelling on the negative today in
view of all the good that has and will continue to transpire
in the years ahead.
So with all due respect to the economists that were so offended,
“Way to go Arnold!”
Random thought for September 2004:
The inherent vice of capitalism is the unequal sharing
of the blessings. The inherent blessing of socialism is the
equal sharing of misery.
-Winston Churchill
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