Friday, August 26, 2005

The new "Goldilocks" economy

Remember the old Goldilocks economy--growth was not too fast and not too slow -- it was just right? Well, this is the new Goldilocks economy, it's not so good and it's not so bad -- it's just OK.

NYTimes hack Paul Krugman has an oped saying that workers salaries are not rising even though GDP is because greedy corporations are taking all the profits they are making and giving them to their senior executives (and paying healthcare costs). I think executive compensation in the US is way out of proportion to the value those guys create, but I also know that it's a tiny fraction of money compared to total wage payout. Even if every executive in the US was paid $0, workers would not get much extra money (last time I calculated that figure it was around $30 extra per year per worker).

I think the US economy is in the middle of a profound restructuring while the world economy is also going through a profound restructuring. Ultimately, America's ability to adapt and find comparitive advantage, and its companies to find innovative new competitive advantage, will determine what happens to wages.

There are 3 main things going on:

1) There is a world wide liquidity glut which means real interest rates are too low. This is not feeding into inflation for reasons I do not understand. It is feeding the US housing bubble.

2) There is a dramatic increase in labor worldwide as China and India inject 2B workers (and consumers) into the global economy, I don't think the world will ever see such a dramatic step increase in productive capital ever again.

3) Essentially, China and India are a "new technology" that enables the same goods to be produced for lower cost. This means that real prices for most household goods are falling. The big exception is petrol, which is more expensive, but is a smaller fraction of household expenditure than it used to be.

So how do I feel about this if I'm a US consumer? If I have a house I feel pretty good -- I'd want to take that equity out and save it somewhere else. If I don't have a house but want one I feel bad because I cannot afford one. If I'm a plain ole renter I feel pretty good because rents have gone down.

My job is pretty secure, but I'm not getting big bonuses and raises (all my extra compensation is going into healthcare). By the same token, inflation is not reducing my real wage even if my nominal wage is pretty flat. And most of the things I buy are actually getting cheaper.

If I have an SUV I feel kinda bad, but people have been making me feel bad about that purchase for years and now they get to say "I told you so". Of course, the same people who were shrieking "SUVs are Evil!" are now saying "Spare a thought for that poor SUV owner!" demonstrating a certain obtuseness on their part, but what else is new.

This all seems pretty mixed to me -- not too good, but certainly not too bad.


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