As I mentioned in earlier columns, there are times when the economic data point in one direction, and businessmen in the privacy of their board rooms point in another. A case in point is the recent report that the recession is over: the housing and manufacturing sectors are recovering; once threatened with terminal illness, Ford Motor Company seems to have moved into profit; and retailers have sheathed the hari-kari knives they sharpened in anticipation of a gloomy holiday season as many categories of goods -- sporting goods, appliances, apparel -- sell at the most robust pace in a year, although not at the levels recorded at the peak of the consumer boom. Sales last month ran about 2% higher than in October 2008, the second monthly year-over-year increase and the highest level since April 2008. Even retailers in recession-hit California are beginning to believe that there just might be a Santa Claus.
"I'll believe it when I see it on my top line," seems to be the attitude of most businessmen, who are hoarding cash in record amounts. The Wall Street Journal estimates that corporate cash hoards now total over $1 trillion, or about 11% of assets, compared with $846 billion, or less than 8% of assets not much more than a year ago. Show us the demand, not statistics about the demand, corporate executives say, and we will dip into our ample treasuries and begin investing and, more important to the Obama administration and a Congress now only one year away from an election, hiring.
Which might in the end be very good news indeed, and provide evidence to help resolve the question of the durability and speed of the recovery that seems to be underway. You know: which letter of the alphabet do you most believe in -- the V of a rapid recovery, the W of a double-dip recession, the U of a bumping along before recovery takes hold, or any other part of the alphabet soup that is on the menu of all forecasters these days.
Lest you put too much faith in economists, consider their record at the time of the recession of 1982. As David Leonhardt reports in the New York Times, the recession seemed to be ending in the autumn, but the unemployment rate was heading to 10% as Ronald Reagan and Federal Reserve Board chairman Paul Volcker sought to ring Jimmy Carter's inflation out of the system. The New York Times quoted prominent economists who worried that "the recovery may amount to nothing more than a few quarters of paltry growth -- and possibly not even that [and] had growing doubts about whether the mechanisms of economic recovery will -- or can -- operate as they have in other business cycles." The economy, no respecter of economists' forecasts or worries, proceeded to grow at the rapid annual rate of six percent for the next two years.
Which might provide some perspective on today's job report, showing that the economy lost another 190,000 jobs in October, taking total losses since the recession started to 15.7 million and the unemployment rate past the politically sensitive double-digit mark, to 10.2%. About where it was right before the rapid economic growth of the early 1980s.
It certainly seems possible that the pieces are in place for a similar rapid recovery. The pile of cash on which corporations are sitting is available for investment and hiring at the first signs of a durable recovery in consumer demand. Inventories are at low enough levels to encourage restocking, especially since the holiday season now seems likely to be merrier than was believed only a few months ago. The dollar is weak and weakening, which should encourage exports and discourage imports, meaning more jobs for American workers. The Federal Reserve Board's monetary policy gurus met last week and the inflation doves routed the inflation hawks -- for those who don't follow Fed internal disputes, this means that those who see no threat of inflation, or of a rise in inflationary expectations, and who believe that the excess capacity in the economy will keep prices from rising, are in the policymakers' drivers seat and will keep interest rates low for the foreseeable future. Good news for the housing and other interest-rate sensitive industries.
All of that should add up to a decent recovery -- unless.... There is a nagging fear among those who closely watch not only the economy but government policy that these nascent economic forces might be murdered in their cradle by the current administration. Small businessmen I have met with last week tell me they are in a state of paralysis as they watch the debate over the health care "reform" bill wending its way through Congress. Lurking in its 1,502 pages (the senate version) are provisions that will markedly raise their costs, and their personal taxes. So even as business gets better, they won't take on more staff, since they can't figure out just what the costs of doing so will be.
Then there is the turmoil over all aspects of the financial services industries. The bonus brawl is the most widely publicized, with bankers somehow stunned that the public should resent their record takings after being bailed out by the government and, in cases such as Goldman Sachs, continuing to benefit from government guarantees of their debt. More important, the indecision on reform of the banking sector continue to weigh on growth, as banks develop ever more stringent restrictions on credit availability while they wait to see who wins the battle between the Obama White House, which wants to give more power to the Fed, and a Congress, led by Massachusetts congressman Barney Frank, that wants to give the Treasury authority to close down any financial institution it deems unfit.
This is no small matter, as the at least partly non-political Fed is less likely than the completely political Treasury to move against an institution for purely partisan political reasons.
Then there is that old bogey taxes. Economists who have the administration's ear just do not believe that higher marginal tax rates will slow economic growth. They are flirting with such things as a 60% rate on the incremental income of high earners or, in the case of congressmen searching desperately for a way to fund the president's $1 trillion health care plan, a "millionaire's tax" on the order of a 5% surcharge on the taxes of anyone earning that sum. This is in part a reaction to extreme supply-siders who persuaded Republican politicians that any and all tax cuts actually produce more revenue. But it is in part due to a belief that markets don't work the way that traditional economists believe, that money incentives do not drive risk-taking and hard work, and that therefore appropriating a larger portion of national income for the state will not affect the growth rate.
So when deciding which letter of the alphabet seems the more plausible description of the shape of the current recovery, you have to weigh the positive signals from the economy against what some, myself included, believe to be the negative impact of the policy errors already made, with more apparently in store for us.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).