mm428: Upbeat words from the Fed


© Ketian Chen |

MUDGE’s Musings

We begin this Independence Day celebration in the U.S. with a rather gloomy attitude.

We’re still losing good men and women to the misguided and mishandled Iraq and Afghanistan wars. Fuel and food prices seem to be climbing as we watch. Once my monthly bills from ExxonMobil, my gasoline purveyor of choice (the reason why this is so is worthy of a post of its own — soon!) were under $100. Now, maintaining the same or less driving, as I try to mitigate the costs of commuting with more days working from home, I’m relieved if that bill is under $200.

What we hear of the economy (job losses, inflation rate) and its thermometer (the Dow Jones Industrial Average) is disturbing. Aren’t we officially in recession?

Every one of us knows someone, or more than one, job-seeking.

And the news from the world outside our parochial boundaries is not much better. War news from Iraq, Afghanistan and Pakistan remains grim. The president of Zimbabwe, certain that he’d lose in a fair election, murdered thousands of opposition supporters, and sent his opponent fleeing to the Netherlands embassy for shelter. Israel seems to be seriously considering a preemptory attack on Iran’s nuclear bomb facilities. Gazprom, the Russian petroleum/natural gas giant, has its sights set on becoming the largest corporation in the world before long. How can any of that be good by any measure?

Well, a couple of chieftains at the Federal Reserve Bank have decided to show us a glass half full version of the part of the story they influence, the economy. And, it makes for some attention-grabbing reading.


How Are We Doing?

By W. Michael Cox and Richard Alm From the July/August 2008 Issue

The American economy is in a rough patch. But the long-term trends are good—and there is a price to economic pessimism.

When a presidential election year collides with iffy economic times, the public’s view of the U.S. economy turns gloomy. Perspective shrinks in favor of short-term assessments that focus on such unpleasant realities as falling job counts, sluggish GDP growth, uncertain incomes, rising oil and food prices, subprime mortgage woes, and wobbly financial markets.

Taken together, it’s enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective— getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress. Once we do that, we see the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

Cox and Alm go ahead and illustrate their thesis quite compellingly.

As Americans know, today’s rising food and energy prices are crimping household budgets. But there are other ways to understand the relative size of the rise of food and energy costs. For example, in terms of time worked at the average pay rate, the real cost of a 12-item basket of basic foods has hardly budged. And while the work-time price of gasoline doubled in recent years, a gallon of gasoline still goes for less than 11 minutes of work (Fig. 3). At 20 miles per gallon, an hour of work will get you 110 miles down the road; at 30 mpg, you can go 165 miles.

And, if you make the comparisons broad enough, we’ve come a long way in 58 years.

The lament-filled anecdotes about long hours and low pay just don’t stand up to the test of hard data. Real total compensation—wages plus fringe benefits, both adjusted for inflation—has been rising steadily for several generations (Fig. 4). Over time, the fringes have become a larger share of the rewards for work, dampening the statistics on wage increases. At the same time, we’re spending less time at work. An average workweek has fallen from 39.8 hours in 1950 to 36.9 hours in 1973 to 33.8 hours today.

The tables and graphs that accompany the story are worthy of study in their own right. The one showing EBay activity peaking during U.S. working hours is quite telling. Apparently, more than a little of our leisure time is spent while on the job.

The standard of living goes up, and so does safety, both on the job, and off. One number that pops out, though not a subject of the essay, is the comparison of deaths per billion miles between automobiles and airplanes. You are 100 times safer flying than driving. Too bad they never got around to inventing those flying cars the futurists have been promising for 100 years! And then there’s health care, the bugaboo of politicians everywhere.

Medical advances have brought down death rates for many diseases (Fig. 10). Gains have been made against heart disease and cancer in recent decades. Death rates from disease aren’t the only sign that Americans have benefited from rising healthcare spending. Since 1960, life expectancy has risen by seven years for men and six years for women. At a time when so many Americans are vexed by the high cost of healthcare, these gains suggest the country may be getting something for its money (Fig. 11).

The conclusion drawn by these fine gents from the Federal Reserve is that, despite the short term clouds, it’s been mostly sunny for a long time, and there’s no reason why this long-term trend shouldn’t continue.

So many data points add up to steady, continuing progress for average Americans—and there’s no reason not to expect the future will bring further progress. Bad news will pop up from time to time, just as it has in every decade of American history.

And if you read to the end, you get a nice reminder that, even with the Dow stocks taking something of a beating currently, that few investments beat stock investing in the long run. (As I used to respond to the calls from new brokers who cold-called me, I invest in commodities: hamburger meat and buns, lettuce, apples, milk. There’s nothing left for stocks!).

How Are We Doing? — The American, A Magazine of Ideas

Yr (justifiably humble svt takes all of this good news with some measure of skepticism.

I just love being strategic, taking the long view and all, but it really is difficult to reconcile the writers’ long-term positives with the day-to-day reality of $4.199/gallon gasoline, and the $5.23 box of bran flakes on the grocery shelf.

But, we’re all going to parade, or watch the parades (and this election year, those parades will be longer than usual since there will be plenty of smiling and waving photo opportunities for your favorite local and national politicians). We’ll sit on our picnic blankets and listen to the bands and ooh and ah over the fireworks.

For one day, at least, we can celebrate. In that spirit, of parades, band concerts, picnics and fireworks, we should enjoy this contribution to our entertainment by our friends in the Federal Reserve.

Monday, back to the real, glass half empty, world.

Happy Independence Day!

It’s it for now. Thanks,

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One Response to mm428: Upbeat words from the Fed

  1. […] in this nanocorner of the ‘Sphere© quite frequently, most recently while highlighting this glass-half-full analysis from two senior Federal Reserve Bank officials. The U.S. economic juggernaut didn’t get to its current poor state by itself. President Bush, […]

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