Secret Weapon
BYLINE: Steve Forbes
Senators Charles Schumer (Democrat--New York) and Jim Webb (Democrat--Virginia) asked the Congressional Budget Office to conduct a study on economic volatility. Their assumption was that instability had grown in recent years and that this is a critical reason for the American middle class feeling anxious and squeezed. The study's conclusion: Contrary to expectation, there is no more earnings volatility today than there was a quarter of a century ago. A surprised Senator Schumer told the New York Times, "Intuitively, you would think volatility is increasing. But it isn't, which I guess shows that the American economy has always been very flexible."
Economists will have to dig deeper to find the actual reasons behind income changes--job loss, divorce, retirement, mothers temporarily leaving the workforce. But the bottom line is as Schumer said: The U.S. economy is very adaptable to changing times and circumstances. That's why, for instance, we rapidly came out of the 1970s slump and ushered in the high-tech era. Before Ronald Reagan took office in 1981 reams of books and analyses were being written about America's descent into permanent stagnation and inflation. That stagflation turned out to be only a short detour.
The CBO study should give pause to those who, extrapolating from the present ad infinitum, conclude that the 21st century will be dominated by China and India. At some point, when the catch-up cards--particularly in manufacturing--are played out, both countries will "hit the wall." Will they continue to rapidly expand once industry-creating innovation and the ability to undergo painful changes and contractions in existing industries and companies become essential? In other words, will they be able to withstand what Joseph Schumpeter euphemistically called "creative destruction" in order to reach the next economic stage?
Germany and Japan were once thought of as wunderkind econ-omies destined to leave the U.S. in the dust. But Germany began to sputter in the mid-1970s, and Japan went off the rails in 1989. Neither has recovered its former verve. And look at the former Soviet Union--in the 1950s it actually grew faster than the U.S.
In the late 19th century Great Britain, the birthplace of the Industrial Revolution, began to run out of gas. Only with the reforms Prime Minister Margaret Thatcher pushed through in the 1980s did this Sceptred Isle once again become an economic growth engine. And don't forget that Argentina was once one of the richest econ-omies in the world. Today it ranks about 70th in per capita income.
So far no other nation has demonstrated the U.S.' repeated capacity to innovate and to renew itself.
Inflating U.S. Worries
All of which leads to the question of the hour: why are Americans so moody and anxious today? Part of the answer is the war in Iraq. But that can hardly be the dominant downer, particularly since our armed forces are entirely volunteer-based, and therefore parents and their offspring do not have conscription hanging over their heads.
Moreover, the vast majority of Americans today don't expect to be laid off anytime soon. True, the volatility may be perceived as more widespread than it is. In the past layoffs were concentrated in manufacturing, which was a significantly larger part of the economy following WWII than it is today. Now layoffs or induced retirements are as common in the service sector as in manufacturing. X rays taken in a Chicago hospital, for instance, can be read almost as quickly in India as in Chicago--and at a much lower cost.
The media play up bad economic news now more than ever, which leads to misperceptions about economic reality. Part of this is fueled by hostility toward George Bush (we saw something similar in the 1980s when Ronald Reagan was President), but perhaps a bigger factor is that traditional media, particularly newspapers, are being hit by the hurricane-force winds of change, an unprecedented event in the lifetime of most journalists. Hardly a day goes by without a media company announcing another round of layoffs.
There may be yet another villain at work: inflation. Many of us are familiar with John Maynard Keynes' quote, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." True, prices are not rising in the fashion in which they rose in the 1970s and early 1980s. But the inflation the Fed mistakenly fired up three years ago has certainly distorted the economy, thereby unnecessarily stirring up anxieties.
Inflation always sends commodities rocketing upward, and this time has been no exception. Higher fuel prices at the pump didn't derail the economy, but they certainly adversely affected people's mood and added to the notion that middle-class Americans are on a treadmill--with the treadmill outpacing them.
Housing construction was crackling before 2004 because of Congress' virtual elimination of the capital gains tax on primary residences in 1997. But the Fed-fed inflation fired up the housing boom to white-hot levels. Flush with cash, lenders lowered loan standards, and new players entered the mortgage market. Fraud blossomed--why examine too closely a borrower's 1040 when rising prices will bail you out if the borrower gets in trouble? Speculators paid people to file mortgage applications to buy houses and apartments and quickly flip them. Now the sale price of houses is falling in many parts of the country. To add insult to injury, property taxes continue to climb as assessments catch up with housing values.
More-expensive gasoline devastated Detroit--GM, Ford and Chrysler were far more dependent on SUV sales than their foreign competitors were.
Inflation made playing with leverage even more enticing for hedge and equity funds. Excess liquidity plus ever more leverage are enabling equity funds to buy out almost any publicly held company.
Inflation is also pumping steroids into the phenomenon of companies buying in their own stock, which is boosting stock market indexes (see).
Of course, inflation always leads to terrible morning-after consequences. This time will be no exception.
Plastic Politics
Plastics may be convenient, but they sure are politically incorrect. San Francisco recently banned the use of standard plastic bags at large supermarkets and pharmacies because they aren't biodegradable like paper bags are. Plastic bags also, supposedly, generate more pollution. Consumers will now have to use compostable bags that are made of corn or potato starch, or bags made from recycled paper.
As in the case of global warming, though, emotion has once again trumped the facts. Paper bags cost 5 times as much as their plastic counterparts to produce; they are also bigger polluters, as they require 4 times the energy to produce and almost 100 times the energy to recycle. Contrary to popular myth, paper bags don't degrade much faster than plastic ones in landfills, as the garbage is compacted--which is why in some landfills you can find well-preserved, decades-old newspapers. Paper bags also take up considerably more space in landfills. But PC vanity reigns unperturbed in San Francisco--and also undoubtedly in the Bay City's imitators.
Hollyweird
Hollywood Station--by Joseph Wambaugh (Little, Brown, $24.99). As any tourist can testify, reel Hollywood is a polar opposite of the real Hollywood. Wambaugh brilliantly brings the tawdry, pathetically delusional Hollywood to life through the eyes of a police department reeling from scandal, the 1992 Rodney King riots and a federal consent decree that could have been concocted only by a Justice Department inhaling Alice-in-Wonderland-like substances.
This is one of those rare crime novels in which the characters are infinitely richer and more memorable than the plot. The cops include a surf-loving pair nicknamed Flotsam and Jetsam; a wannabe actor dubbed Hollywood Nate; a lactating female officer, introduced as she takes time out to use a breast pump; a grizzled, seen-it-all sergeant, the Oracle, who apparently stays on the job to cover alimony payments; and a Ukrainian-born officer, whose mangled English could have been written by the current occupant of the Oval Office. The street characters are even more memorable.
Were higher-ups in our currently dysfunctional Justice Department ever to read this book they'd quickly dispose of that LAPD consent decree, which, in the name of reform, has gummed up the department with paperwork and led to head-shaking ways of getting around PC decrees so the department can still do some police work.
RESTAURANTS: GO, CONSIDER, STOP
Edible enlightenment from our eatery expert Tom Jones and colleagues Patrick Cooke and Monie Begley, as well as brothers Bob, Kip and Tim.
The Morgan Dining Room--the Morgan Library & Museum, 225 Madison Ave., at 37th St. (Tel.: 212-683-2130). The Morgan seats about 40, is reasonably priced and is open for lunch, weekend brunch and dinner on Friday evenings. The delicious fare is based mainly on favorites of the early 20th century. Best dishes sampled: beef Wellington, chicken fricassee, skate. Memorable desserts: apple cobbler and Victorian trifle.
Tsukushi--300 East 41st St. (Tel.: 212-599-8888). This is a Japanese omakase restaurant--no menu; everything served is chef's choice. The clientele is mostly Japanese, and by the rows of client shochu bottles, it seems they are many, regular and loyal. The broccoli rabe and bonito flakes served in fish stock is light and delicious, but the later courses--sesame tofu soup, slivers of duck served with macaroni salad, broiled cod--are mediocre at best.
Oak Room--The Algonquin Hotel, 59 West 44th St. (Tel.: 212- 840-6800). A gentle respite from the modern world, this is a diminutive version of an old-fashioned supper club. The prix-fixe menu is the kind of fare served before everyone took their food so seriously: roasted chicken, steak, pasta with mushrooms, dessert. All followed by cabaret entertainment guaranteed to charm.