Scoping 2007

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

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NY Sun
NEW YORK SUN CONTRIBUTOR

As 2006 draws to a close, economists are going through the usual ritual of trying to predict how Americans will fare financially in the coming year.

There are cautious bears. Merrill Lynch’s David Rosenberg is concerned about the time it might take to work off the housing surplus and what that could do to construction industry jobs. He is thinking dark thoughts about the fall in asset prices that preceded the 2001 recession. This time his worry is about property values.

Michael T. Darda of MKM Partners is relatively bullish, basing his optimism on an uptick in economic growth in the fourth quarter that might suggest an end to the midyear slowdown. This is happening despite the Federal Reserve’s year-long escalation of interest rates, which has lowered inflation and inflation expectations. But neither he nor many other respected economists thinks inflation has been tamed sufficiently for the Federal Reserve to start opening the money spigots again. Keynesian theory quite to the contrary, economies do better when the Fed is holding inflation in check than when the opposite is true.

In short, with the usual caveats of the type raised by Mr. Rosenberg, the outlook for 2007 is good. Even when the economy was growing at only a 2% annual rate in the third quarter, it was only one point off the historical average of 3% a year. And it apparently has climbed back to a growth rate closer to that average in the fourth quarter. The stock market responded well to signs of recovery and evidence that the housing adjustment is proving less painful than some expected. Market jitters set in just before Christmas, perhaps due to a call for higher taxes by Robert Rubin, Bill Clinton’s Treasury secretary and a leading Democratic Party economic strategist, after the Democrats’ victory in November. Nonetheless, the Dow Jones Industrial Average ended last week up more than 13% from a year earlier.

If the market was spooked by Mr. Rubin, it would be understandable. There seems little doubt that America owes its robust recovery from the 2001 recession to the Bush cuts in the highest marginal tax rates and taxes on investment in 2003. The economy grew at a well-above-average 4% rate thereafter, until this year’s moderation of the construction boom. The increase in economic growth meant that federal revenues are up, not down as tax cut opponents predicted. The federal budget deficit for the fiscal year ended last September 30 was $248 billion, far below the $423 billion projected earlier in the year by the White House, despite an increase in federal spending.

The economic resurgence delivered something close to full employment. The current 4.5% unemployment rate is just a half point above the 4% that economists regard as the minimum achievable in light of the number of workers in the floating labor force, that is, those between jobs or temporarily laid up. The rapid economic growth after the 2003 tax cuts also has bailed out state governments that got caught with too many obligations and too little revenue by the 2001 recession. In a recent survey by the National Conference of State Legislatures, 23 states reported revenue above forecasts and 22 reported them on target. Only three reported below-estimate results. The news isn’t as cheery as a year ago, when 42 states were surprised by unpredicted riches, but the strong revenue growth is putting states in better fiscal shape. Because of state surpluses, the net total of all government borrowing — federal, state, and local — has become a relatively minor burden on the capital markets.

Even the fiscal condition of chronic over-spenders like New York has improved. New Jersey’s outlook is more problematic. The Tax Foundation estimates that this year’s budget “compromise” between Governor Corzine, who wanted a one-point boost in the sales tax, and the Democratic legislature, which favored stealth taxes, will cost the state’s already overtaxed citizens an extra $1.8 billion.

Despite the long record of state financial mismanagement, the greater New York metropolitan area displays surprising vigor as we enter the new year. It is, after all, a huge population center, swollen by a rising tide of hard-working recent immigrants, whose productive efforts keep service industries such as hotels and restaurants humming. These newcomers also expand the market for consumer goods and services. At the upper end of the food chain, the financial services industry, for which the region is justly famous, is thriving once again as savings and investment burgeon.

So as we close out the old year, the outlook is not at all bleak, even taking into account the legitimate fears that economists raise about inflation and the housing market. The country and the region, by and large, are economically healthy. Let’s hope that public policy makers at some level of government don’t find some way to screw things up.

NY Sun
NEW YORK SUN CONTRIBUTOR

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.


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