Interesting Opinion article from this morning's WSJ.
There Is No 'The Economy'
By ZACHARY KARABELL
June 30, 2008
It used to be said that the two things not to discuss at a dinner party were religion and politics. Today, those pose less risk of flying food or guests storming out than the subject of "the economy."
One side decries the sorry state of affairs, and the other grumpily rebuts the claims of doom. The public debate is being won by those who say that the economy is in bad shape and getting worse. The consumer confidence report just released by the Conference Board registered one of the lowest readings on record, based on pessimism about food and fuel prices, slack labor markets and plummeting home prices.
David Gothard
Democrats, recognizing a potent election-year issue, emphasize economic problems whenever possible. Republicans can hardly gild the lily given much of the data, but they point out that all is not grim. Retail sales and consumer spending were up decently in May, in spite of worsening confidence. Exports have been solid, and GDP figures have yet to register a contraction.
As this debate intensifies in the coming months, which side is right? The answer is both, and neither.
To steal a phrase from Sen. Joseph Biden, we are all entitled to our own opinions, not to our own facts. Yet in the case of the economy, even when the facts are correct they don't apply evenly to all people. Or to put it another way, there is no such thing as "the economy."
Once upon a time, and for most of the 20th century, there was. The data that we use today is a product of the nation-state, and was created in order to give government the tools to gauge the health of the nation. The Bureau of Labor Statistics, which measures the unemployment rate and inflation, was created around the turn of the 20th century, and for much of that century the U.S. was a cohesive unit. It was its own most important market, its own source of consumption, and its own source of credit.
Big-picture statistics form the basis of almost every discussion about "the economy." But these statistics are averages reporting one blended number that is treated as if it applies to all 300 million Americans. It brings to mind the joke about Bill Gates walking into a bar and suddenly everyone in the room becomes a millionaire. Statistically, by averaging the incomes in the room, the statement is true.
Macro data and big-picture statistics like GDP growth, the unemployment rate and consumer spending are all large averages. The fact that the economy is growing or contracting by 1% or 2% is taken as a proxy not just for the economic health of the nation, but for the economic health of the bulk of its citizens. The same goes for consumer spending. If it goes up or down 2%, that is taken as representative not just of the statistical fiction called "the American consumer" but as indicative of the behavior and attitudes of U.S. consumers writ large.
To begin with, someone in the upper-income brackets is living a different life than those in the lower-income brackets. The top 20% of income earners spend more than the lower 60% combined. The wealthiest 400 people have more than $1 trillion in net worth, which exceeds the discretionary spending of the entire federal government. These groups are all American, yet it would be stretching the facts to the breaking point to assert that they share an economic reality. On the upper end, the soaring price of food and fuel hardly matter; on the other end, they matter above all else. The upper end does matter quantitatively, but the group of people on the lower end is vastly larger and therefore has more resonance in our public and electoral debate.
Look at housing, widely regarded as a national calamity. The regional variations depict something different. In Stockton, Calif., one in 75 households are in foreclosure; in Nebraska, the figure is one in every 1,459; and the greater Omaha area is thriving. Similar contrasts could be made between Houston and Tampa, or between Las Vegas and Manhattan. Home prices have plunged in certain regions such as Miami-Dade, and stayed stable in others such as San Francisco and Silicon Valley. Houston, bolstered by soaring oil prices, has a 3.9% unemployment rate; the rate in Detroit, depressed by a collapsing U.S. auto industry, is 6.9%. The notion that these disparate areas share a common housing malaise or similar employment challenges is a fiction.
We hear continual stories of the subprime economy and its fallout on Main Street and Wall Street. All true. Yet there is also an iPhone economy and a Blackberry economy. Ten million iPhones were sold last year at up to $499 a pop, and estimates are for 20 million iPhones sold this year, many at $199 each. That's billions of dollars worth of iPhones. Add in the sales of millions of Blackberrys, GPS devices, game consoles and so on, and you get tens of billions more.
The economy that supports the purchases of these electronic devices is by and large not the same economy that is seeing rampant foreclosures. The economy of the central valley of California is not the same economy of Silicon Valley, any more than the economy of Buffalo is the same as the economy of greater New York City. Yet in our national discussion, it is as if those utterly crucial distinctions simply don't exist. Corn-producing states are doing just fine; car-producing states aren't.
The notion that the U.S. can be viewed as one national economy makes increasingly less sense. More than half the profits of the S&P 500 companies last year came from outside the country, yet in indirect ways those profits did add to the economic growth in the U.S. None of that was captured in our economic statistics, because the way we collect data – sophisticated as it is – has not caught up to the complicated web of capital flows and reimportation of goods by U.S.-listed entities for sale here.
These issues are not confined to the U.S. Every country is responsible for its own national data, and every country is falling victim to a similar fallacy that its national data represent something meaningful called "the economy."
In truth, what used to be "the economy" is just one part of a global chess board, and the data we have is incomplete, misleading, and simultaneously right and wrong. It is right given what it measures, and wrong given what most people conclude on the basis of it.
The world is composed of hundreds of economies that interact with one another in unpredictable and unexpected ways. We cling to the notion of one economy because it creates an illusion of shared experiences. As comforting as that illusion is, it will not restore a simplicity that no longer exists, and clinging to it will not lead to viable solutions for pressing problems.
So let's welcome this new world and discard familiar guideposts, inadequate data and outmoded frameworks. That may be unsettling, but it is a better foundation for wise analysis and sound solutions than clinging to a myth.
Mr. Karabell is president of River Twice Research
