Here’s a bit of comfort as you start the work week: Don’t worry if you find the economic news confusing. It is confusing.
Last week, stock prices took a beating. But share prices are still ahead of where they were a year ago, and the economy grew at a rate of 3.4 percent in the last quarter, the fastest rate since early 2006. Treasury Sec. Hank Paulson, who knows something about the real world, says he has never seen so robust a global economic boom. So relax.
Consider the recent plunge of the dollar. One set of economists warns that this will drive up the cost of imports and reduce the competitive pressure on American producers. Result: inflation, higher interest rates, and a slowing economy.
If you find that analysis disturbing, just tune into another set of experts. They point out that the falling dollar is making American goods cheaper overseas, spurring sales of made-in-America goods, and encouraging a wave of free-spending tourists to come to America and fill our hotels and restaurants. Result: lots of new jobs, investment by export-led industries in new plants, and rapid economic growth.
Who to believe? Both. The falling dollar is quite capable of producing all of the consequences predicted. But Ben Bernanke and the Federal Reserve Board’s monetary policy committee can cool the economy by raising interest rates if the weak dollar threatens to trigger inflation or overheat it.
Then there are the problems in the sub-primemortgage market. One set of experts warns that the higher interest rates demanded by lenders will exacerbate problems in the ailing housing market, kill private equity deals, drag down share prices, cause billions in losses for investors who piled into hedge funds, and scare consumers out of the shopping malls.
Other experts will tell you that the wake-up call for lenders is a healthy development. It will put a stop to improvident lending before the banks become so over-extended that they create a credit crunch that curtails lending to sound borrowers. Prudence has made her reappearance in the nick of time.
Again, believe both. As the collapse of the Bear Stearns hedge funds shows, many investors will find that they underestimated the risk they took on. Some private equity operators now have to pay more for the capital they want to borrow, but there is still plenty of money around to fund sensible deals on sensible terms.
Not let’s consider oil and gasoline prices. One set of analysts says $80/barrel crude oil and $3/gallon gasoline will force consumers to divert spending from apparel, furniture and vacations to the more crucial role of keeping their SUVs rolling. Meanwhile, airlines, truckers, and companies that rely on petroleum-based raw materials will be forced to raise prices. The Fed will respond by raising interest rates to contain the resulting inflation. Result: a recession.
But other economists chortle that higher gasoline prices will force consumers to cancel some of those cross-country vacations, auto manufacturers to accelerate the introduction of fuel-efficient vehicles, and increase the attractiveness of investments in alternative fuels. The result will be a reduction in America’s reliance on crude oil imported from unstable countries with regimes hostile to America, as well as a lower trade deficit.
Both are right. In the near-term, high gasoline prices will force consumers to spend less on other things and put pressure on lots of firms to raise prices, which is not good. But the vigor of global competition will make it difficult for manufacturers to pass on higher costs, and the nation’s security interests are served by the cut-backs in oil imports resulting from higher prices. It‚s a short-run pain for long-term gain.
Finally, consider the airline industry. Airports are already so overloaded with passengers and so burdened with inefficient management that getting from curb to plane is a nightmare. Worse, airlines have reduced staffing levels, can’t seem to arrange for the coincident arrival of passengers and their baggage, and are recording more delays and cancellations than ever. Result: the air transport system is on the verge of collapse.
But if you look at the crush of passengers another way, it shows that air travel has become more affordable. For another, overcrowding at major airports is encouraging better utilization of less-crowded facilities. Finally, higher load factors mean airlines are making money and can therefore afford a new generation of quieter, more fuel-efficient, more comfortable aircraft.
Again, believe both. This summer is a nightmare for travelers. Flights are being delayed and cancelled, and baggage is being lost as overworked staff move from being merely surly to mutinous. But governments are also re-examining the balance between security and convenience, and there may just well be flat-bed seats in all of our futures.
Like Clint Eastwood, readers of economists’ outpourings sometimes have to confront the good, the bad, and the ugly – all at the same time.
Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Policy.
