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Jewish World Review July 23, 2003 / 23 Tamuz, 5763

Mort Zuckerman

Mort Zuckerman
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Making odds on a recovery | Here's the $64 billion question. (That's roughly the amount of money that will be rebated or distributed this summer under the new tax law.) Are we pulling out of a slow-growth period that feels like a recession, or are we sinking deeper? The smart guys and gals who write about the economy are far more optimistic than the smart guys and gals who write the checks. The former will tell you the glass is half full, the latter that the glass is half empty. In both cases, though, the top half of the glass is still dry as a bone.

The optimists point to the fiscal stimuli of huge budget deficits, record-low interest rates, and a weak dollar--three kicks they believe will boost consumer spending and production and create jobs. One marker of public sentiment lending credence to the optimists: the stock market. It's up this year by about $1.4 trillion, with the S&P average trading at a 32-times price-earnings ratio. We're talking bulls here, a herd of 'em. Another sunny sign: the housing market. It's booming, fueled by the lowest interest rates in 50 years.

Pessimists, of course, point to the egg accumulated on the faces of the optimists over the last several years for their unrealized predictions of growth. The average of nearly 1.5 percent for the last couple of years is well below the economy's capacity for growth, despite highly stimulative fiscal and monetary policies. The pessimists find confirmation in the loss of so many private-sector jobs, especially in manufacturing. Employment has now declined for the longest period since the Great Depression.

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Guessing game. The pessimists believe this is a business cycle unlike any other since the end of World War II. In the bubble economy of the late 1990s, investors and businesses paid too much while families spent and borrowed freely; the government, meanwhile, assumed that fat surpluses were guaranteed forever. Now that the bubble has burst, we see there is too much debt--in the private sector especially--compounded by operating and capital account deficits of about $100 billion a year at the state and local government level. Add to that a huge foreign trade deficit that requires us to import some $500 billion of capital just to finance our domestic savings shortfall, and you have strong head winds that will hold back major growth. There is no pent-up demand to pull up the economy from the sectors most sensitive to interest rates, like housing and autos, because we have already had those spurts.

Who's right? Continued cost cutting by companies dubious that a recovery is just around the corner suggests the pessimists are. More than 3.8 million people now draw unemployment benefits, the highest in 20 years. The number looking for jobs has passed 9 million for the first time in 10 years. The unemployment rate has climbed to a nine-year high of 6.4 percent. The economy has lost over 300,000 jobs this year, and unemployment claims are still up around 425,000 a week. Since productivity gains are clearly exceeding the rate of growth, companies can go on cutting payroll while still meeting demand. If this continues, the rate of growth in disposable income will slow, consumption weaknesses will accelerate, and investment will be discouraged even more.

So the toughest question for the optimists is, Why should the economy come roaring back? Not much faith can be placed in the fiscal stimulus proposed and passed by the Bush administration since it is directed much more to stimulating investment spending and benefiting the wealthy. Given the excess capacity we clearly still have and given that the tax benefits will not incite adequate consumer demand, we may well be in for another unpleasant surprise--a slow economy throughout the rest of this year, much like what we have seen over the past two years.

But wait. Surprises are what economics is all about. After all, almost nobody anticipated the investment boom of the 1990s, just as most everyone was blindsided by the slowdown that has now extended into its third year. Today, most policymakers are dumbfounded by the failure of their stimuli to reignite the economy. This may well reflect the lack of understanding of the unique nature of the economic slowdown we have endured.

There is only one player here that has performed brilliantly, and that's the Federal Reserve. Led by Alan Greenspan, the board of governors began cutting interest rates aggressively in 2001, long before it was clear that we were in a recession. The Fed's willingness to maintain low interest rates and cut them still further comforts the business community, knowing that Greenspan & Co. remain vigilant for signs of further slowdown and the risk of deflation. Greenspan knows this is no time to risk the possibility of this economy getting worse.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


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© 2001, Mortimer Zuckerman