Tuesday, January 23, 2007

The Greatest Economy Ever

Are we in the midst of one of, if not the, greatest economies of all times? If you read the papers or listen to the nightly news, you would never think that. In fact, most Americans are pessimistic about the economy (though optimistic about their personal financial situations).

Here's some thoughts to cogitate on while listening to the doom and gloom:

1) The stock market is at an all-time high,
2) Retirement accounts have recovered from the collapse of the 90's bubble,
3) Unemployment is at a 25-year low,
4) Taxes are at 20-year lows,
5) Federal revenues are at all-time highs,
6) The Federal deficit is down almost 50%, extremely unusual during a prolonged war and increased Federal spending
7) Real estate values have soared,
8) Inflation is at a 20-year low,
9) Home ownership is at an all time high,
10) Corporations are reporting record profits
11) Our job growth rate is the highest in the world

I've read a couple of articles recently that triggered this post. The first was from the UK Times - The Great Moderation, that discusses how the historical peaks and valleys of booms and busts has moderated substantially over the past 25 years. We have has a lengthy period of low inflation, low interest rates and stable and continuous growth. And the major predictors (like long term interest rates) remain stable despite minor changes in Fed rates.

The other story that peaked my interest was on CNNMoney - Everyone Wants to Start a Business. This is a trend that is pretty unique to the American culture and the main reason, in my opinion, that our economy leads the Western World in growth rates (I will say that I see the same thing going on in China right now as well, but limited in scope.) Start-up's of small business' drive job growth in this country. Further, new businesses growth is what creates the "creative destruction" that Joseph Schumpeter" described as essential to well functioning capitalist societies. If you never study any economic theory again, I would advise you to study the idea of creative destruction. You will really understand why entrepreneurship and outsourcing are all good and necessary parts of our booming economy. During the 1970's nearly no one talked about starting a business - I never once heard this discussed in college. But today it is the rage.

The third part of the equation is an insight provided by my favorite Economist, Paul Zane Pilzer, in his book Unlimited Wealth. I wrote a post called Prosperity or Scarcity discussing Pilzers' premise that technology has transformed the formation of wealth to the point where we have unlimited resources. To quote him:


"Technology is the major determinate of wealth because it determines the nature
and supply of physical resources".

Here's a look at the stock market for the past 60 years:




Since the 1980's the growth has been nearly exponential (plot it on a logarithmic scale and it is a straight line). One of the reasons I failed to start investing in my 401k was that when I started working in the '70's the stock market had been flat for over 10 years.

So are we in the greatest economy ever? I think so, due to three factors:

  1. Reagans' policies transformed us from a "jobs culture" to an "entrepreneurial culture" which has driven "creative destruction" to the greatest levels of all time
  2. Technology has opened the door to unlimited resources and unshackled us from the "fixed-pie" paradigm that Keynes used to dominate thinking about our economy.
  3. The Federal Reserve Board has been driven to keep money supplies constant since Volker took over in the 80's and price stability has allowed businesses the confidence to expand.

Certainly, nothing is permanent. Some mad jihadist could explode a nuclear device somewhere and devastate the economy, politicians can change tax policy or appoint a new Fed chief that disrupts the economy. But for now, this is not your fathers economy. So don't buy into doom and gloom. Take advantage and create prosperity for yourself.

update:The Roaring Twenties are Back!

The State of the Economy

Is the unemployment rate about to collapse?



2 comments:

everydayfinance said...

After reading Drucker, The World is Flat and more, it's evident that we can't allow non-market internventions to impede development and evolution of our markets. Things like subsidies, tax increases, regulation, tariffs (in most cases) are there to simply appease voters in certain regions for short term gain, but impede our country's competitive stance. For instance, forcing ethanol on the country and the panacea at inflated prices (high tariffs from central america) has driven up food prices and increased inflation, while doing nothing for gas prices since we have refinery capacity shortfalls.

Paul said...

Excellent comment.

I think that politicians simply can't refrain from appeasing their constituants - it's like a drug to them.

Ethanol is the great boondoggle of our time. In the 70's it was oil from coal. I think many companies will be burned when market forces kick in again and the price of oil drops in half.