AMERICANS RETURN TO WORK TODAY after a bittersweet weekend. Yesterday we celebrated our Declaration of Independence from Britain with fireworks, parades, unfurled flags, and the consumption of 150 million hotdogs, a statistic that warms the hearts at the National Hot Dog and Sausage Council, but probably curls the hair of the health police.
But we also worried about mounting casualties in the war in Iraq, and were disturbed by recollections of internet and television images of beheadings and random explosions triggered by young suicide bombers who prefer death to life in the emerging Iraqi democracy. Polls show that about half of the country is wondering if it was worth carrying the war on terror to Iraq.
So President Bush, in a televised address to the nation to lay out the progress being made in Iraq, last week urged all Americans to do something to show our troops that the country is behind them–send a parcel or an email, or make a phone call. Millions did as the president asked, and most, including the 51 percent who are telling pollsters we should have stayed out of Iraq, agree that there is no alternative to staying the course.
Any unhappiness about America’s overseas ventures, and about high gasoline prices, did not stop us from celebrating the holiday in traditional fashion. By Monday night over 40 million Americans had traveled 50 miles or more to visit friends and family, or to reach the beach or mountains. Of those, 34 million hopped into their cars and SUVs, soaring gasoline prices notwithstanding. Prices have risen 12 cents per gallon since the end of May, to a national average of $2.22, and shortages of refining capacity make it likely that gasoline prices will stay high even if crude oil prices ease.
The surprising thing is that $60 crude oil has not slowed the economy–at least, not yet. But the day of reckoning may be upon us. Experts estimate that this year’s increase in oil prices, from about $40 to $60 per barrel, has cost the economy some $75 billion. That’s the equivalent of a new tax on consumers. Businesses, too, are hurting. Fed Ex says higher fuel costs are eating into profits; airlines are struggling despite an increase in travel; chemical and steel companies are burdened by higher prices for fuel; auto companies are watching sales of their large, most profitable vehicles, dwindle.
No surprise, then, that U.S. factory conditions are described by Goldman Sachs’ economists as “soggy” because of the decline in orders for capital goods (other than civilian aircraft and military hardware). Or that Standard & Poor’s index of 500 stocks has dropped about 2 percent this year.
But somehow the economy continues to grow. Figures released last week show that the economy grew at an annual rate of 3.8 percent in the first quarter of this year, and there is little reason to believe that it has slowed substantially in recent months. Sales of building materials and furniture are increasing sharply, in tandem with a booming market for homes. The jobs market may not be growing as rapidly as some of the president’s critics claim they could make it grow, but the unemployment rate is a low 5.1 percent, and over the past year the number of jobs increased in 48 of 50 states, and in the District of Columbia, with Arnold Schwarzenegger’s California and Jeb Bush’s Florida leading the parade with job gains of 254,500 and 225,500.
The increased availability of jobs may explain why consumer confidence rose sharply in June to a three-year high. Or it may be that consumers have noticed that inflation is tame and poses no threat to their real purchasing power. More likely, it is that the soaring value of their homes has made Americans very much richer than they were at this time last year, even after cashing in some of the equity in their homes and spending the proceeds on everything from flat-screen television sets to new furniture.
None of which tells us too much about what the economy will look like when the last barbecue embers have been doused. Economists have wildly divergent views about the near- and medium-term outlooks. Some predict that high oil prices and rising wages will trigger a bout of inflation; others say sustained gains in productivity will more than offset rising input costs. Some expect a housing bubble to burst, shattering Federal Reserve Board chairman Alan Greenspan’s reputation as an economic manager and sending the economy into a tailspin; others say that a shortage of supply of land, rising demand for second homes and starter homes by immigrants, and historically low interest rates will keep the home-building industry operating at full tilt.
Some say that uncontrolled government spending and unsustainable trade deficits will convert the current solid economic growth rate into a recession. Others point out that the cumulative federal deficit in the first 8 months of this year is down more than 21 percent from last year, and argue that the trade deficit merely reflects the fact that the U.S. economy is growing much faster than those of its sclerotic trading partners.
In the long run, to paraphrase the late economist, Herb Stein, if the federal and trade deficits are unsustainable, they won’t be sustained–although it might take a falling dollar and unaccustomed spending restraint by Congress and the president to correct these imbalances. But more important to those looking beyond current statistics, is what Bear Stearns economist David Malpass calls the “younger-than-elsewhere, hard-working, increasingly prosperous middle class.” Combine that with a flexible capital market and a risk-taking entrepreneurial class, and Americans, 94 percent of whom tell pollsters they are satisfied with their lives, should have much to cheer about on many holiday weekends to come.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
