LET ME DIE WITH THE PHILISTINES:

Bye-bye macro economy (Max Fraad Wolff, 7/01/05, Asia Time)

[P]rofits remain strong notwithstanding serious risk of profit deceleration from a flattening yield curve, over-exposure to highly leveraged consumers and strengthening dollars. One might pause to note that leading American firms have worked ceaselessly over the last 30 years to diversify away from excessive reliance on what used to be called the US economy. Bureau of Economic Analysis (BEA) estimates suggest that more than a quarter of American corporate profits were earned outside the US in 2004. There is consensus that this number will continue robust growth in the years ahead. This might suggest the dangers of conflating profits with domestic economic health.

The news on the other three fronts, representing over three-quarters of the American economy, is terrible! Our general public, larger by over 10 million since 2001, is just recovering the jobs lost across a short and steep recession followed by a protracted and painful "recovery". In May, we finally recovered the March 2001 employment numbers. The stunning growth in employment that has so many crowing is net 0.03% private sector employment growth over 50 months. Since World War II, it has taken an average of 23 months to regain pre-recession employment levels. This time it took 50.

Real median wage and salary growth have under-performed badly. Miraculously, consumer spending has risen by several percentage points as a gross domestic product (GDP) component while wages and salaries have fallen as a national income component. Consumer debt, particularly in the housing area, has grown at super-exponential rates. 2004 marked the all-time high-water mark for corporate profits as a percentage of national income and a 40-year low for wage compensation as a national income share. Before the "new economy", when macro economics referred to more than assets, bubbles and profits, this was called redistribution and viewed with some nervousness. Fortunately our leading lights are busy taking the dismal - and perhaps the science - out of the dismal science.

The federal budget, despite the recently ballyhooed excitement about a mere $350 billion projected shortfall, is dismally in the red. Long-term commitments like prescription drug coverage, $354 billion in underfunded insured pensions and changing population demographics beg for skepticism regarding these projections. In addition, the supplemental spending games and likely high future costs of foreign and domestic security operations mock rosy forecasts. Rapid growth in non-discretionary spending and proposed tax cut extensions render ebullience absurd. So goes another pillar of that strong macro economy.

Americans, even after their increased spending, enjoy record household net worth--a record that gets broken pretty much every quarter. As Mr. Wolff notes, we've gotten back to full employment despite (or because of) adding millions of immigrant laborers and being the only industrialized nation that reproduces at replacement level. The twenty-plus year epoch of economic growth we're in the midst of has been accompanied by debt, deficits, and trade imbalances.

Whatever pillars he's referring to are in as rough a shape as if Samson had a go at them.

Posted by Orrin Judd at June 30, 2005 8:14 PM