Why the Economy Is Better Than You Think

The media love bad news. Bad news sells. A story with the headline "America's Best Airports" probably won't be as popular as a story called "America's Worst Airports." For another example, here's a story about the U.S. economy from the latest issue of Newsweek, "Why It's Worse Than You Think." Not a surprising piece, given that the magazine made its recession call back in February, though the economy has stubbornly refused to roll over. A few choice bits of negativity from writer Daniel Gross:

But at root, $4-per-gallon gasoline and $20-per-pound steaks are largely a function of the changing economic geography, and the diminished stature of the U.S....The realization that the U.S. no longer controls its economic destiny is contributing to the widespread feeling of unease and crisis of confidence. Economically speaking, the 1990s belonged to the U.S. and New York and Silicon Valley. But as this decade motors toward its close, it seems powered by China and Russia and Dubai and Mumbai. It's as though we're home watching reruns while everybody else is out partying.

In other words, the declinist 1970s are back, and they're not going away. But is the U.S. economy really replaying that horrific 1970s show, plagued by out-of-control oil prices, out-of-control inflation, and an out-of-control economy that produces wild swings from growth to deep recession and back? Again, I am reminded of something one of my history professors at Northwestern University once told me, "History rarely repeats itself but historians often do." I don't think this a rerun for the following reasons:

1) Fewer than 8 percent of private-sector workers are covered by unions. That's way down from the 1970s and means that the transfer mechanism of higher food and energy inflation into cost-of-living wage adjustments—collective bargaining—has been severed.

2) A more service-oriented U.S. economy is far more resilient to energy shocks than it was in the 1970s. Tech helps, too, allowing folks to work at home or videoconference instead of flying to a meeting.

3) Not only does the rise of global capitalism and trade help keep costs here low but provides a source of growth, through exports, for the currently anemic U.S. economy. Yet according to Gross, we should be bummed out by Rising Asia.

4) Although beset by an oil spike and a housing plunge, the core U.S. economy is in far better shape than it was in the 1970s. Productivity, the key measure of an economy's strength, consistently grew at less than 2 percent in the 1970s and stayed weak until the tax cuts, deregulation, inflation fighting, and corporate restructuring of the 1980s blossomed into the tech and productivity boom on the 1990s and beyond. Productivity has averaged about 2 ½ percent since 1995 and is now running closer to 3 percent. Recently, the World Economic Forum rated the competitiveness of the major economies, and America's came out on top.

I like to think of it this way: If you could swap the American economy for someone else's long term—China's, India's, the EU's—would you? (Apparently, Gross and Newsweek would choose. "All of the above.") China, for instance, has far worse demographic problems, has far worse environmental problems, will probably never catch America in terms of per capita GDP, and, by the way, still needs to fully transition to democratic capitalism. America? It's in far better shape that you think.