The Diehard Economy

Why the doomsayers keep getting it wrong.

By Justin Fox

If worrying were a sport, Henry Kaufman would be in the hall of fame. In his heyday as chief economist at Salomon Brothers in the 1970s and early 1980s, Kaufman was a thundering prophet of American malaise and decline. He was known in the press as either Dr. Gloom or Dr. Doom, and you can't say the nicknames were unfair. "I am aghast at how much our country has faltered," he said in a characteristically downbeat 1980 speech. "The path to sustainable economic growth seems lost to us."

After Kaufman left Salomon in 1988 to start his own economic advisory firm, he continued to issue dour pronouncements on a regular basis. But he hasn't been in the news much lately, so I stopped by his office at the end of March to find out if he could still do the gloom thing. He gave it his best: Businesses are deep in debt. Managers are too short-term oriented. Financial markets are fraught with more risk than ever. Mergers are eating away at the competition that has been at the heart of American success.

But then I read back to him that passage from his 1980 speech and asked, "Aren't we a bunch better off than we were then?" "Absolutely," Kaufman quickly replied. "This is a wonderful moment."

Being Henry Kaufman, he then couldn't help but launch into a discourse on how we must address all those problems he worries about. The point here, though, is that when even Dr. Doom has good things to say about the U.S. economy, something significant is going on.

What is going on is this: After the longest expansion ever, the economy screeched to a halt last year. Then, after a brief and not very deep recession, it started growing again. It survived a stock market slide and an outright crash in the tech and telecom sectors. It survived a near-vertical drop in corporate profits. It survived the bankruptcies of Enron, Kmart, and Global Crossing. It survived the destruction of the World Trade Center.

As always, dangers may be lurking just ahead. But the current debate over whether growth will be 2% or 4% this year, whether housing sales will hold up, whether business investment will rebound anytime soon, misses an essential point: The American economy of 2002 is a remarkable sight to behold. At 5.7% in March, unemployment is certainly up from the 3.9% of October 2000. That stuff happens when you have a recession. But it's at a level that would have signaled near boom times during the 1970s and 1980s. While growth was slow last year, it wasn't negative--real GDP actually expanded 1.2% in 2001, a recession-year performance surpassed only in 1960. Real after-tax personal income rose 3.6% for the year. Productivity, that flawed but powerful measure of how much economic value Americans generate per hour worked, grew a stunning 5.2% in the fourth quarter. And while it won't keep up that pace, it does appear to have returned to an upward trajectory not seen since the 1960s.

We have arrived at this moment of relative economic bliss despite being told over and over again during the past 20 years that we were headed for the abyss. I'm something of a connoisseur of economic doomsaying. Among the books stacked on my office shelf are The End of Affluence, The Endangered American Dream, The Downsizing of America, and The Internet Depression. My wife and I were even characters in a scaremongering European bestseller a few years ago that was translated into English as The Globalization Trap. The author, an Austrian journalist and family friend, used the cramped dimensions of our old Manhattan apartment as evidence of the failure of American-style free markets.

For a couple of years in the late 1990s we were also confronted by books with titles like Dow 36,000 and The Long Boom and well-paid experts arguing on TV that the economy was going to grow at 5% a year forever and Priceline.com really was worth $160 a share. But for some reason I never bought any of those books, and with the crash of Internet stocks and last year's economic downturn, the pessimists have returned.

The recurrent theme of their worry, ever since the U.S. economy began pulling out of the brutal 1981-82 recession, is that we're living on borrowed time and borrowed money. Some Americans may be doing well, some parts of the U.S. economy may be thriving, but it won't last because sooner or later we'll have to pay back all those loans or the stock market will stop rising or our foreign competitors will start eating our lunch.

It is undeniably true that American consumers won't be able to rack up ever larger credit card bills forever, and that foreign investors won't keep pouring vast sums of money into the U.S. forever, and that the U.S. won't always be (and isn't now) the undisputed leader in every new technology. But after years of reading about these worries and to a certain extent sharing them, I'm finally about ready to say, so what? The unsustainable federal deficit of the 1980s and early 1990s was converted into a surplus without bringing the economy down. The unsustainable stock market run-up of the late 1990s came to an end, and the economy appears to be just fine. Detroit long ago fell from its perch of global dominance, and not just the economy but the U.S. auto industry survived and thrived.

My point is not that everything's perfect and the business cycle is dead and Priceline should again be selling for $160 a share. It is that statistics like the level of consumer debt or the size of the trade deficit don't matter in and of themselves. What matters are the basics: How fast is the economy growing? How many people have jobs? How much money are they making?

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