Do a thought experiment: Think back a year ago to what most analysts were predicting for the financial sector and for the state of the economy. In his newspaper column, Paul Krugman repeatedly warned that the policies adopted by the Bush and Obama administrations would have dire consequences. There was talk in other corners about no new business lending, slumping retail sales, and rising unemployment with no end in sight.
But here we are—in the midst of a rebound. Each week over the last year, a number of positive and negative economic indicators were announced. From my vantage point, the positive signs (“green shoots”) have been more numerous. Where others saw premonitions of a double-dip recession, I saw the slow revival of the economy. From April of this year to the end of 2011, I predict GDP growth of 3 percent to 5 percent per year and five million net new jobs (about 250,000 jobs a month) from the lowest level of the downturn, along with an unemployment rate of 8 percent. The recovery should continue in 2012 and the unemployment rate should dip below 7 percent by the summer of 2012.
Am I crazy? As of today, here are four important green shoots: First, the upturn in private investment. Declines in investment during recessions are much larger than any other component of the economy. From start of recession through June, 2009, real private investment spending was down 31 percent; since then it is up 16 percent.
Secondly, the rise in inventories. Inventories are very responsive to the business downturns. In 2008 and 2009, inventories fell by nearly $150 billion. In 2010, inventories are rising. Third, business confidence. The latest poll of business owners shows more companies planning to invest now than at any time since the onset of the recession. And fourth, finally, by most accounts, consumer confidence is rising. A survey of the affluent (in households with incomes greater than $90,000) shows a rising number planning on increasing their investments and consumption.
Often, the same people who are pessimistic about the recovery are also pessimistic about the United States keeping its place as the world’s leading economy. They talk in particular of China displacing the United States. This is nonsense. Size matters—we have the largest integrated single market, which permits economies of scale in terms of costs, especially for research, and a greater division of labor that permits specialized services. English is the world language in business and science, and the dollar is the world’s currency. When the global economy is in trouble, investors around the world seek a safe haven in dollar-backed assets.
Our open economy encourages risk tasking; just ask the people behind the formation of 600,000 new businesses each year and the nine million who are self-employed. Because of this, we have a positive inflow of scientists and entrepreneurs—approximately one-quarter of the founders of Silicon Valley startups were non-Americans. And we have a great infrastructure for growth: an educated work force; many of the best universities in the world, which attract lots of foreign talent; access to capital; a good legal system; and an open society that encourages change. Europeans understand that Microsoft, Cisco, Apple, Intel, and the whole Internet revolution could not have started in Europe because businesspeople there are more risk averse and reluctant to build new relationships. And we have a thriving middle class that is ready to move, change jobs, and try new products.
Sorry Mr. Rose, but I don't buy your argument, and I won't buy your book.
Now, with the punchy tag-line out of the way, let me say that I find most of your evidence points toward a cautiously optimistic outlook for the economy. That outlook won't sell many books, granted, but it is more in keeping with reality.
First, you point out the rise in private investment, inventories, and business sentiment. In all three cases, the numbers could hardly have gotten any worse so I see no reason to get ga-ga over the improvement.
The loss of manufacturing jobs? Still a problem, no matter what you argue about the growth of the service-sector economy. The service-oriented economy we have re ... view full comment
Sorry Mr. Rose, but I don't buy your argument, and I won't buy your book. Now, with the punchy tag-line out of the way, let me say that I find most of your evidence points toward a cautiously optimistic outlook for the economy. That outlook won't sell many books, granted, but it is more in keeping with reality. First, you point out the rise in private investment, inventories, and business sentiment. In all three cases, the numbers could hardly have gotten any worse so I see no reason to get ga-ga over the improvement. The loss of manufacturing jobs? Still a problem, no matter what you argue about the growth of the service-sector economy. The service-oriented economy we have reduced ourselves to is nothing to crow about. Germany is a good model for where we could be: producing high-end manufactured products that command a premium. Ever driven a BMW or Mercedes? They are better, more refined cars than anything that comes from Lexus or Infinity. Know why? Germans value quality product, and keep the manufacture of their high-end products at home where there is less chance of it being backwards-engineered. The best path to sustained growth in the near future is through exports, and we are not in a good position to export manufactured goods. Finally, when I read the part about assets rising faster than debt, I just laughed. Guess what? That isn't going to be true in the coming 10 years! It was the availability of cheap credit that brought that rise in asset prices, and cheap credit is gone in the short-term future. Americans, and our government, are going to have to start saving. With the 2/3 of our economy that is consumer consumption dialed back, and the world not exactly lapping up our exports, we have leaner times ahead. I agree, there are many intrinsic strengths to the American economy, but your vision of it "coming roaring back" is pie-in-the-sky.
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