That Seldom Heard Encouraging Word


By Christopher Farrell The mood is sour on Wall Street and Main Street these days. Gasoline prices are at record highs, the stock market is foundering, and the fear over outsourcing of high-skill jobs to developing nations is reaching fever pitch. Social Security and Medicare are going broke, or so the government's green-eyeshade brigade tells us.

Warren Buffett, the greatest stock-picker of the past half-century, is warning that America's yawning trade deficit with the rest of the world is a disaster waiting to happen. Stephen Roach, Morgan Stanley's chief economist, is so worried about financial and real estate market bubbles he wrote an open letter to the Fed calling for an immediate hike in its benchmark interest rate from 1% to 3%.

The contest for the Presidency is turning out to be as negative as predicted by the political pundits. And fears of terrorism after the latest Madrid blasts are sapping spirits everywhere.

"WILD LAUGHTER." I think it's time for a reality check. What's everyone really complaining about? That India and China are joining the global trading system? That Russia and Taiwan just had democratic elections, however imperfect, for their Presidents? That the American productivity growth rate jumped to a 3% average annual rate from 1995 to 2003, about double the anemic pace of 1973 to 1995?

"We -- the globally collective we -- are getting rich so much faster than before that we ought to be in need of sedatives to subdue the wild laughter," says James Griffin, economist consultant at ING Investment Management.

Let's not lose sight of the bigger picture here. Even with the threat of terrorism, freer trade is invigorating global growth by providing entrepreneurs from all the world's major economies access to bigger markets. The Austrian economist Friedrich Hayek emphasized the role the markets play in creating and disseminating knowledge. In the Information Age, the cost of gathering and sharing information and knowledge has plummeted even as the size of the market has expanded exponentially.

"Capitalism, as Hayek conceived it, was fundamentally dynamic, and that dynamism was due to the discovery of new needs and new ways of fulfilling them by entrepreneurs possessed with 'resourcefulness,'" writes historian Jerry Muller in The Mind and the Market. These are the tantalizing glimmers of a payoff from globalization.

WHAT IF? Productivity growth isn't the magic mantra it was a few years ago because, as the U.S. loses manufacturing jobs, an increasingly efficient Corporate America is under little pressure to add to its payrolls. Nevertheless, "productivity growth is what determines our living standards, the competitive advantage of companies, and the wealth of nations," says Erik Brynolfssohn, an economist at MIT.

Take the recent report on Social Security issued by the system's trustees. It assumes under its intermediate projection (essentially the baseline forecast) that productivity will grow at an average annual rate of 1.6%, and that the Social Security system runs into financial trouble come 2042. Yet, consider this: The Social Security problem largely disappears if the productivity growth rate hits an underlying trend growth rate of 2.5% a year.

Yes, the job market is miserable during this economic recovery compared to previous rebounds. But what if the recession that the National Bureau of Economic Research says ended in November, 2001, is the wrong benchmark? Last March, business confidence plunged again when the U.S. invaded Iraq, and economic activity largely ground to a halt. Yes, job growth is still disappointing over the past 12 months, but this experience is more in line with the past.

RISKS REMAIN. It's also important to note that household wealth is now at record levels. One big reason is that the homeownership rate is up to just under 69% of all American households -- a new record and an increase from 64% a decade ago. Technological innovation continues to flourish in Silicon Valley and other hotbeds of entrepreneurship.

This isn't to say that all is rosy with the American economy and society. Lots of risks confront the economy, from the drag of steep oil prices to America's dysfunctional health-care system. Still, sometimes it's worth taking a step back to avoid getting caught up in the gloom of the moment. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online


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