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Jewish World Review Dec. 28, 2000 / 2 Teves, 5761

George Will

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Soft landing in a spoiled nation -- AMERICANS quickly come to think of pleasures as entitlements, so as the gaudy economic expansion encounters turbulence, they seem not just stunned but affronted. The stock market, however, is simply doing its job, reallocating capital from unproductive to more productive uses. This is, so far, what a soft landing of a high-flying economy looks like. And the vocal angst of many investors is what a soft landing sounds like in a spoiled nation that is becoming the crybaby of the Western world.

Economic expansions are not like human beings and light bulbs. Expansions do not inevitably expire of natural causes. They could continue indefinitely, absent policy blunders by government or major mistakes by sizable elements of the private sector. The latter sort of mistakes have been made, particularly in overinvestment in technology and dot-com sectors. But government has two powerful levers for moving the faltering economy -- interest rates, which are high, and fiscal policy, which is tight because government is running a surplus. Interest rates and taxes can be lowered.

Anyway, America's long expansion may not be over. Housing starts are up, the job market remains strong, and some producers' difficulties are consumers' delights: AT&T has cut its dividend for the first time in 113 years, and its stock is down 60 percent, but, then, long distance rates have fallen 35 percent in seven years, and cell phone rates even faster -- in effect, a huge transfer of wealth from producers to consumers of those services.

Third-quarter growth (2.4 percent) was less than half the second-quarter rate (5.6), and sobering economic indicators have been multiplying for many months. Sobriety -- a virtue, lest we forget -- was producing dot-com carnage last spring. Investors were at long last pulling back from valuing companies for prospects -- often chimerical -- rather than profits, and were belatedly acknowledging that, ultimately, profits dictate share prices.

On Oct. 12, in a sell-off unrelated to technology, the Dow began falling 379.21 points (3.6 percent) minutes after Home Depot, one of Wall Street's top growth stocks and a bellwether of consumer spending, warned that third-quarter earnings would fall short of analysts' expectations. Home Depot's stock plunged 28 percent because the firm's growth was 4 rather than 7 percent. But 4 percent is hardly agony. Besides, the analysts who set expectations sell stocks -- so they sell expectations. Furthermore, Home Depot ascribed its disappointment to the happy fact, for consumers, of falling prices of some building products. For example, during the summer, when housing starts slowed, sawmills did not, so lumber prices fell.

Alex Berenson of the New York Times reports that this year technology and communications companies raised $330 billion from selling stocks and bonds -- $1,200 for every American. Telecommunications companies raised $111 billion, up from just $3.8 billion in 1990. Scarce engineers were lured with stock options. That encouraged management to inflate share prices to retain talent. Investor giddiness caused anomalies. For example, Corvis, an optical equipment maker, last summer was briefly worth more than GM. Cisco stock is down 55 percent from its high, Intel 58 percent, Lucent Technologies 80 percent.

Bearish analysts say aspects of today's prosperity are illusory, and unsustainable. This is, they say, because, as in America in the 1920s and in Japan more recently, the prosperity has been paid for by improvident borrowing. There certainly has been a surge of borrowing by corporations and consumers, and now asset values are declining and the debt remains. Profits have been an unsustainably high portion of GDP and wages an unsustainably low portion. Corrections are underway.

In the automobile sector, the inventory of vehicles is alarmingly high. The "wealth effect" caused consumer spending to surge as portfolio values surged. Now a "negative wealth effect" has consumer confidence falling more precipitously among the affluent -- people with ailing portfolios -- than among average Americans.

The nation's savings rate approached zero during the 1990s spending binge. Now spenders are retrenching, feeling poorer and fearing layoffs. Before the bubble of Internet optimism popped, too much office space was built and rented, advertising agencies expanded too much based on dot-com advertising, too many high fliers made more trips to Tiffany's and pricey restaurants than they can now make.

So we may be entering the first downturn of the "new economy." But this is America's fifth "new economy" -- that of the internal combustion engine followed that of the electric motor, which followed that of the railroads, which followed that of steam-powered manufacturing. Which is one reason why, particularly at moments like this, economics seems like a science of single instances -- not a reassuring guide.

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