[Vision2020] NYT on the Economy

[Nicholas Gier]

November 4, 2006
Editorial
The Economy Cools

The latest information about the economy leaves no question that it has
slowed down by just about every measure — housing and manufacturing,
retail sales and job growth, and others.

Even the recent increase in compensation is generally believed to be a
sign of coming layoffs, not a harbinger of wage inflation. When business
dries up at firms and factories, employers don’t cut back immediately.
So for a time, pay and benefits hang in there. As for the recent
improvement in the unemployment rate, sorry to say, it’s an aberration.
The job market won’t turn up in any meaningful way when the overall
direction of the economy is down.

All of this information has fed the debate on the dominant economic
question of the day: Is the United States economy headed toward the
longed-for soft landing, in which it cools without contracting. Or is
another recession inevitable? It’s an interesting question, but in many
ways it also is a diversion.

Most Americans are ill prepared for an economic deceleration, even if it
ends in a soft landing. When economic basics like income and insurance
coverage are taken into account, most working families are no better off
now than they were when the economic expansion began in late 2001.

They have been held back, primarily, by lousy pay. In 26 of the past 30
months, wages for most of the work force have failed to outpace
inflation, even as corporate profits have hit historical highs.

The wage stagnation was masked, in part, by rising home equity that
allowed many families to borrow heavily. It was cheap and easy money.
But that debt burden could turn onerous as rates on adjustable mortgages
rise. If jobs and housing head south together, the picture that emerges
is one of families with inadequate — if any — financial cushions for the
tough times ahead.

And, if the landing isn’t soft — the odds are about 50-50 now — the
economic pain is likely to be exacerbated by the fact that policymakers
will have a narrow range of responses from which to choose.

The traditional remedies for a downturn are cutting taxes and cutting
interest rates. But the reckless tax cuts of the last five years already
point to worsening deficits in the future, leaving no room in the
federal budget for more tax cuts.

The nation’s poor financial condition could also muffle the generally
salutary effects of interest-rate cuts. That’s because the nation’s
persistent indebtedness could provoke a fall in the dollar, in which
case higher interest rates would most likely be needed to attract the
foreign loans the government needed to operate.

The figures from one month or one quarter are not enough to divine the
future. So we can all still hope that economic reality won’t bite. But
given the nation’s constrained circumstances, hoping is about all we can do.