Morning Is Coming

by Stephen J. Rose | July 1, 2010

Do a thought experiment: Think back a year ago to what most analysts were predicting for the financial sector and for the state of the economy. In his newspaper column, Paul Krugman repeatedly warned that the policies adopted by the Bush and Obama administrations would have dire consequences. There was talk in other corners about no new business lending, slumping retail sales, and rising unemployment with no end in sight.

But here we are—in the midst of a rebound. Each week over the last year, a number of positive and negative economic indicators were announced. From my vantage point, the positive signs (“green shoots”) have been more numerous. Where others saw premonitions of a double-dip recession, I saw the slow revival of the economy. From April of this year to the end of 2011, I predict GDP growth of 3 percent to 5 percent per year and five million net new jobs (about 250,000 jobs a month) from the lowest level of the downturn, along with an unemployment rate of 8 percent. The recovery should continue in 2012 and the unemployment rate should dip below 7 percent by the summer of 2012.

Am I crazy? As of today, here are four important green shoots: First, the upturn in private investment. Declines in investment during recessions are much larger than any other component of the economy. From start of recession through June, 2009, real private investment spending was down 31 percent; since then it is up 16 percent.

Secondly, the rise in inventories. Inventories are very responsive to the business downturns. In 2008 and 2009, inventories fell by nearly $150 billion. In 2010, inventories are rising. Third, business confidence. The latest poll of business owners shows more companies planning to invest now than at any time since the onset of the recession. And fourth, finally, by most accounts, consumer confidence is rising. A survey of the affluent (in households with incomes greater than $90,000) shows a rising number planning on increasing their investments and consumption.

Often, the same people who are pessimistic about the recovery are also pessimistic about the United States keeping its place as the world’s leading economy. They talk in particular of China displacing the United States. This is nonsense. Size matters—we have the largest integrated single market, which permits economies of scale in terms of costs, especially for research, and a greater division of labor that permits specialized services. English is the world language in business and science, and the dollar is the world’s currency. When the global economy is in trouble, investors around the world seek a safe haven in dollar-backed assets.

Our open economy encourages risk tasking; just ask the people behind the formation of 600,000 new businesses each year and the nine million who are self-employed. Because of this, we have a positive inflow of scientists and entrepreneurs—approximately one-quarter of the founders of Silicon Valley startups were non-Americans. And we have a great infrastructure for growth: an educated work force; many of the best universities in the world, which attract lots of foreign talent; access to capital; a good legal system; and an open society that encourages change. Europeans understand that Microsoft, Cisco, Apple, Intel, and the whole Internet revolution could not have started in Europe because businesspeople there are more risk averse and reluctant to build new relationships. And we have a thriving middle class that is ready to move, change jobs, and try new products.

If you look at the American capitalism since World War II, there are ample grounds for optimism. The U.S. economy has experienced almost continuous growth, punctuated by infrequent recessions, from which we have emerged stronger than ever. But the pessimists insist that this recession is different. Here, let me review some of their arguments, and why they are wrong.

First, pessimists like to cite Carmen Reinhart and Kenneth Rogoff’s book, This Time is Different, that shows that countries take an unusually long time to recover from the kind of financial crisis we suffered. But their data are based primarily on smaller countries that relied mostly on foreign loans and on pre-World War II data from large industrialized countries. The American economy is larger and has more policy tools available to it than any of the economies they study. From 1985 to 2007, we had a succession of financial crises that seemed to augur deep troubles—from the S&L meltdown and the 1987 stock market crash to the collapse of Long Term Capital Management to the bursting of the dot-com bubble—and we bounced back.

Second, many pessimists point to the decline in jobs in the manufacturing sector and to the absence of well-paying middle-class jobs as an indication the U.S. is living on borrowed time. But throughout the world, the share of employment in manufacturing has fallen sharply because of technological progress—in the U.S., for instance, we make as much coal and raw steel as we did 50 years ago, but require about one-quarter of the number of workers to do so.

Over the last 50 years, the labor force has become increasingly skilled, as the share of workers with some post-secondary education climbed from 20 percent to 60 percent. The pay of these more educated workers has increased relative to those with at most a high school diploma. Most of these people work in offices, hospitals, and schools and not in blue-collar manufacturing jobs. By contrast, the lower-skill service sector has not grown as a percentage of the labor force. What the pessimists take as a sign of decline is really a sign of progress.

Third, the doomsayers point to America’s growing trade deficit. But the benefits of international trade are widespread while the pain is concentrated among specific workers, companies, and regions. I defy anyone to show a negative relationship between rising trade deficits and any indicator of overall employment over the last 30 years. Even in Rust Belt states, overall state output and employment grew significantly from 1980 through 2007. The fear of China and India, two countries with millions of poor peasants, reprises the discredited notion that one country’s gain must come at the cost of another country’s loss.

Fourth, the pessimists cite the extent of personal, business, government, and international indebtedness. Yes, personal debt is high relative to income, but assets (even at today’s reduced levels) have grown faster than debt over the last 20 years. Our international debt looks intimidating, but every prediction of near collapse has failed to be realized. Despite our status as the world’s greatest debtor, the annual flow of capital income into our country has outpaced the payments on our debt for each of last 30 years. And while government debt looks out of control, we can reduce our debt to manageable levels simply by increasing taxes and cutting spending. This may seem like a crazy notion in today’s climate, but who would have predicted Congress bailing out Wall Street with $700 billion dollars?

Let me conclude with a caveat. This economic crisis has had many unexpected shocks that knocked our economy off of its moorings. We’ve had an unprecedented, multitrillion-dollar response from the Federal Reserve and the federal government, and support for further government bailouts is virtually nonexistent. The crisis has also exposed the downside of globalization. We’ve seen that problems can spread with lightning speed across countries so that something that happens in a faraway land could set the world economy tumbling down again. Despite the green shoots, and the history of America quickly rebounding from other recessions since 1945, unexpected events could still slow the recovery. But I think the weight of evidence is on the side of optimism rather than pessimism.

Stephen J. Rose is a Research Professor at Georgetown University and author of Rebound: Why America Will Emerge Stronger From The Financial Crisis.

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