When Thinking Economy, Think Exception

Most jokes about economists end with the economist making an unwitting and all too truthful statement that leads to his demise, and thus the economics profession feels Senator Gramm’s pain this week. But few politicians want to address the substance of Mr. Gramm’s remarks: whether America is in a recession.For the record, government data show that the economy as a whole expanded in real, inflation-adjusted terms in the first quarter of the year. Indeed, it was the 26th consecutive quarter of expansion, and most economists who follow such matters expect the second quarter to be the 27th of expansion. It is politically popular to fret about recession, but it is difficult to find support for recession in government data.Government data may not be exactly right, but they are the best numbers we have. Many economists hold that the government data systematically understates economic growth by overstating inflation, undervaluing new and innovative products and services, and failing to account for some invisible parts of the economy.For the nation as a whole, the economy is growing, but not all Americans, and not all firms, industries, or regions of the country, are doing as well as the average. An individual, firm, or industry may be in economic distress, but it does not follow that the nation, therefore, is in financial disarray. Doctors do not expect all individuals to be medically healthy at the same time; economists have the same view about the financial health of individuals, firms, and industries.The observation that some struggle while others succeed is the norm rather than the exception, and thus it gives little insight into the overall state of the economy. This week, Fannie Mae, Freddie Mac, and IndyMac are not doing well. Exxon and Anheuser Busch are faring much better. In any given week, one can find struggling and successful firms.Nor is economic prosperity uniform across the country. Between the first quarter of 2007 and the first quarter of 2008, personal income increased at different rates geographically. New Yorkers’ personal income grew 4.5%, slightly below the national average of 4.8%. These averages mask substantial ranges geographically both across different states and within states.The natural resource states of North Dakota, South Dakota, Wyoming, Louisiana, Oklahoma, and Texas all had growth rates of more than 6.7%. In contrast, the manufacturing states of Rhode Island, Michigan, Delaware, and Ohio all had personal income grow at less than 3%, while measured inflation for personal consumption was 3.4%. Arguably, those manufacturing states had negative real income growth.Not all consumers face the same sets of prices or price changes. The national rate of 3.4% for personal consumption expenditures may seem a low rate of inflation to many consumers, but for others, the rate more than offsets price increases. Consumers who face unusually high rates of price changes will be worse off than average, but other consumers will be better off.Moreover, declines in the value of major assets — such as homes and retirement funds — over the past year may make many Americans glum even if their household earned incomes have risen more than inflation. It is little consolation to Americans that the value of their assets has increased more rapidly than inflation over the past six or seven years, a trend that is not mathematically sustainable.An economy, no matter how strong or weak, consists of individuals and firms with differing abilities and prospects. Government sentiments and sensibilities naturally focus on those firms and those individuals most in distress. It is not inconsistent — indeed, it is necessarily true — that even when the economy is growing, some firms and individuals have painfully difficult times. It does not follow, however, that when some firms or individuals have financial difficulties the economy is necessarily in a recession.Individuals and firms have opportunities, not guarantees, to succeed. Outcomes are not certain, with the possible exception that economists will certainly continue to make unwitting and all-too-truthful statements.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

When Thinking Economy, Think Exception

When Thinking Economy, Think Exception

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