12.27.11 9:45 AM ET
2012 Economic Outlook: Why Things Are Better Than We Think
Years from now, when we look back at 2011, it may be remembered as one of the best worst years of the early 21st century. You’d be hard-pressed to come up with an extended period where people were more negative, yet remarkably, in the United States at least, not much actually happened. A summer debt impasse looked dramatic but in the end was resolved, and markets went up and down wildly yet ended largely where they started or better. Judged by every major economic indicator, it was the most stable period in a long while, with every sign that 2012 will be better yet. There is only one not-so-small problem: almost no one believes it.
In the current climate, even suggesting that things are OK can generate virulent reactions. How can one say that the economy is decent when tens of millions of people are unemployed, underemployed, discouraged, or don’t get paid enough to keep them above the poverty line? When the global financial system remains imperiled by a European sovereign-debt crisis that nearly exploded in November and is by no means fully resolved? And when the best the U.S. can hope for is a level of growth well below that of the second part of the 20th century and far less than most people expect or desire?
All of the above is true. Yet, those truths can and do coexist with the reality that the statistical entity known as the U.S. economy is much healthier than most people think. It is the health of middle age, however, not the flush of youth, and saddled with an unhelpful dash of Peter Pan syndrome. Overall growth for the next year is shaping up to be 2 percent, give or take. That is pretty lame compared to the heady days of the 1990s or even the mid-2000s. But those seemingly halcyon periods benefited from bubbles, whether the stock market and telecom spending in the 1990s or the housing and debt-inflated growth of the mid-2000s. So while activity now doesn’t look so good by those comparisons, it is actual economic activity undistorted by bubbles. It’s as if the economy of the past 20 years was wearing platform shoes (“Wow, she’s like 6 feet tall”); it looked a lot bigger than it was.
Now, growth is less impressive but for the first time in a long while, it is real. Yes, government debt has ballooned, but it has done so in a climate of very low interest rates, which means that servicing the public debt costs less than at any point since the 1980s. I’ve learned the hard way that debt is the third rail of rational discussion, but unless you’re alarmed by big numbers (“We have trillions in debt!”), the dollar amount shouldn’t be the issue. After all, the United States also has a very large economy. Big economy, big debts.
It is also true that we have a structural jobs issue, but not an issue of making things and innovating. American manufacturing remains highly productive and a significant component of economic vitality, but it employs far fewer people (12 million or so and declining) and far more technology. It is a pillar of the statistical economy but not of employment. So too are the wondrous new worlds of Silicon Valley and social media, which thrived in 2011 and will continue to into 2012, but which primarily benefit those already doing well (if you can afford an iPhone and use one, you tend to have a college degree and do not face the same job challenges as a high-school-educated construction worker). In the year ahead, the gap between the digital haves and have-nots is likely to grow along with income inequality, but in a country of 300 million people, the number doing well exceeds the number struggling by a considerable margin. Not a reason to back-pat, but not cause for ritual group-excoriation either.
In the last months of 2011, every major indicator of economic health in the United States showed marked improvement: manufacturing, sentiment, holiday sales, e-commerce, inflation, and employment. Even government is shrinking, a fact that Republican candidates strenuously avoid and which Democrats uncomfortably skirt because it means large-scale government-employee layoffs; there are nearly 400,000 fewer government workers now than there were at the end of 2010. Yet there are more people employed overall. Wages have not increased for years but nor is income decreasing the way it was. In almost every way, the U.S. economy is stable, which is a far cry from robust and an equally far cry from dismal.
The European crisis has revealed another strength in the American economy: we have, as yet, no problem funding our needs. The financial system is still burdened by the overhang of several million home foreclosures and overly stringent lending standards by banks, but that system is more stable and sober than in many years. The outrage against Wall Street pay notwithstanding, the financial industry is slowly contracting and becoming less profitable—though still hugely lucrative and overly so, but more like the 1980s and heading back to the 1970s.
The absurd S&P downgrade of the U.S. credit rating during the summer had no effect on interest rates or on the ability of the U.S. to fund itself. One day, for sure, if competitiveness dives and China surges and the rest of the world moves ahead, there will be a moment of reckoning, but that moment remains distant. That should not be a source of complacency, but nor should it occasion panic.
The mood, however, is bleak. Americans are facing a future different from the past most remember or imagine. It is a future of a competitive global environment fueled by China, and a domestic economy that cannot guarantee endlessly improving living standards. It can ensure a level of affluence but not future growth for subsequent generations that Americans of the mid-20th century came to believe was their birthright. We have a severe mismatch between expectations and reality, and that is a recipe for disappointment and discontent. The result is that even as our economic system is by all measures stable, it is perceived as severely flawed and inadequate.
The positive is that Americans aren’t at ease with massive income inequality, structural unemployment, and a future of diminished hopes. The negative, however, is a groupthink blindness to what we have, which impedes our collective ability to improve and fix what is broken. The hope for 2012 would be some road-to-Damascus moment where Americans politically and culturally realized that we have the means to address unemployment by creating work programs and educational initiatives and public-works projects. We have the means to invest in the future, spend on applied and abstract research, and use the financial and natural resources we have more efficiently.
We are not in desperate economic times. But we believe that we are, and that is as paralyzing today as it was when Franklin Roosevelt famously intoned on his inauguration that fear itself is the biggest obstacle. In 2012, the American economy will do better than muddle and less than soar. Let’s hope for the new year that Americans can adjust to that reality without succumbing to despair.