The Upside of the Downturn
STELZER, IRWIN M.
The Upside of the Downturn There are good reasons why consumers keep spending. BY IRWIN M. STELZER EVERYONE WHO WATCHES the financial news channels and reads the generally depressing economy...
...Where did all the profits go...
...Rather, in part at least, it reflects the fact that wealth destruction has been accompanied by a less easily observed phenomenon—wealth redistribution...
...Which is what is happening in the high-tech industries right now...
...Only low-fare carriers such as Southwest seem capable of sustained prosperity...
...But more went to American workers...
...And there are a lot more families for whom their home represents the biggest item on their balance sheets than there are folks whose wealth is predominantly in shares...
...If this trend doesn't go too far, and there is no reason to believe that it will, profits are likely to remain under pressure even as the economy recovers...
...The Commerce Department now estimates that in the past three years the share of national income going to compensate workers has risen from 70 percent to 73 percent, while the share going to profits has fallen from 12 percent to 9 percent That's pretty close to $250 billion going from dividend checks into paychecks...
...And that's no bad thing...
...Layoffs and increasing competition from immigrants may keep wages from rising at the unskilled end of the labor market, but increases at the upper end are likely to continue to outpace inflation—unless, of course, the combination of the tax rebate now hitting consumers' mailboxes and the Fed's interest rate cuts fail to prevent a major recession...
...That represents a transfer of real wealth from shareholders to workers and consumers...
...This is not irrational denial of reality...
...No one thinks this torrid rate of increase in house prices can continue, especially if the job market takes a turn for the worse...
...Americans know a gamble when they see one...
...Start with the two-thirds of Americans who own their homes...
...Keep that in mind when watching the depressed analysts on the financial news channels...
...price of existing homes in 125 metropolitan areas rose by 6.4 percent ($9,400) over last year's levels, to $146,900...
...Lower interest rates make it cheaper to carry mortgages, in turn making it easier for buyers to bid up house prices...
...in a roughly similar time period, the median value of existing homes has risen by $13,800...
...Easy...
...In the second quarter of this year the median Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of regulatory studies at the Hudson Institute, and a columnistfor the Sunday Times (London...
...Without the prospect of a reasonable return, investors will not make their capital available to entrepreneurs and to corporations...
...None of this is to denigrate the role of profits in making the economy go...
...Meanwhile, excess capacity and foreign competition are forcing a transfer of wealth to consumers, and tight labor markets are forcing a transfer of wealth to workers...
...Sooner or later, no profits mean no investment and fewer jobs...
...But in the face of excess capacity in the high-tech and other industries, declining profits are the market's way of saying "no more...
...Finally, bad news for producers is good news for consumers...
...Nancy Paul, a top business getter with Executive Travel Associates in Washington, D.C., points out that the round trip fares of $296, $376, and $244 between Chicago and La-Guardia, Los Angeles, and Dulles reported recently in the New York Times vanished from sight within a relatively few days...
...What they can't figure out is why American consumers haven't abandoned the shopping malls in order to have more time to compute the exact losses they have suffered in their 401(k) and other accounts...
...Against the suffering of the corporate sector, and of those who profit from profits (including a lot of workers with profit-sharing plans and stocks) must be set the joy of workers who are watching their real incomes rise...
...In short, the plunge in the Dow and the Nasdaq has created some real winners...
...This shift in dollars from corporate bottom lines to workers' pay packets reflects the tight labor markets of recent years and, despite the headline layoffs now, the ongoing shortage of skilled workers...
...Ford and GM are having trouble making money because competition from foreign car makers is forcing them to offer huge discounts to move their metal off the showroom floors...
...The unemployment rate for white collar workers is a mere 2.2 percent, and the Information Technology Association of America estimates that some 420,000 openings for programmers, software engineers, and other high-tech workers will remain unfilled this year...
...The new census data show that the median value of single-family, owner-occupied homes rose from $79,100 in 1990 to $120,162 in 2000, a nice increase of over 50 percent...
...And then we have the airlines...
...When oil prices were soaring, some of them went to the producers' cartel...
...This is an industry that can't stand prosperity: As soon as it gets into the black, it shovels money to its pilots, to its customers, or to both...
...BY IRWIN M. STELZER EVERYONE WHO WATCHES the financial news channels and reads the generally depressing economy stories in the daily press knows one thing: Trillions of dollars of wealth have been destroyed as the stock market continues its descent from the stratosphere...
...But American Express Business Travel Monitor, which tracks fares on 215 frequently traveled domestic routes, says that airfares are now lower than at any time since 1954, and the industry's trade association reports that average fares are more than 8 percent lower than they were last year...
...Since 1999 the median value of those retirement accounts has fallen by $5,700 (from $47,000 to $41,300...
...No surprise, then, that the industry will lose $1.5 billion this year...
...asks a recent edition of Business Week...
...Wealth has shifted from shareowners to homeowners, as the Fed has fought to keep the economy on an even keel by lowering interest rates...
...Remember: Most high-tech workers are employed by non-high-tech firms, not the busted dot-coms and telecommunications companies about whose woes we read so much...
...The National Association of Realtors, using a slightly different method, shows a similar result for a more recent period...
...What these revised data also show is that labor compensation has grown much faster than anyone realized...
...But a growing economy with lower profits is not the end of the world...
...Many lost their bets...
...Which means that the ability of businesses to claim a larger and larger share of the nation's income for their bottom lines is over, at least for now...
...No wonder, then, that "household demand has been sustained," as the Fed announced last week in the statement accompanying its latest rate cut, even as "business profits and capital spending continue to weaken...
...Although the figures are not strictly comparable, it is interesting to compare these increases in house values with the declines in the average value of 401(k) portfolios...
...Intel is in trouble because its Pentium 4, 1.4 gigahertz processor now goes for about $180, compared with $574 on January 1. Small startups are finding that they can afford to rent office space in Silicon Valley, furnish it with swanky furniture bought for 25 cents on the dollar from failed dotcoms ($699 Aeron desk chairs—a back-saving and prestige-enhancing feature of high-tech executive offices—are in such plentiful supply that the Salvation Army won't pick any more up), and equip it with the necessary gear, still in original boxes, at 10 cents on the dollar...
...It seems that falling share prices and a weakening economy have forced Alan Greenspan and his monetary policy colleagues at the Fed to lower interest rates...
...Daily there are reports from America's leading companies of profit targets missed or losses incurred...
...Dell can't get into the black because its computers are selling for 20 percent less than they did at the beginning of the year...
...Right now, having given or offered their pilots huge wage increases, carriers such as United find themselves trying to fill empty seats by lowering fares, although it is difficult to say by how much...
...But instead of whining, they have shrugged and gone about their two businesses— working and spending...
...Then there is the little-noticed transfer of wealth from capitalists to workers, if I may be permitted to use those old-fashioned designations...
...And they gambled on becoming very rich very quick...
...New government data show virtually no growth in the profits of non-financial companies since 1995, if account is taken of the increase in payments to employees who exercised stock options when those options were still worth something...
...But neither does anyone think that house values will shrivel...
Vol. 6 • September 2001 • No. 47
