Thirteen years ago, Gregg Easterbrook wrote a memorable cover story in the New Republic ("The Sky Is Always Falling") about the inability of economic analysis ever to allow even for the possibility of good news. All economic news, Easterbrook observed, is about the bad things that may happen. When employment rises, the appropriate response is not to be glad that fewer children will go hungry, but to brace oneself for runaway inflation. When the dollar is strong, the public is told not to celebrate its enhanced buying power, but to fret that a spike in the trade deficit will destroy America's manufacturing base. And so on. During the Clinton-era boom, some economic commentators rebelled against pessimistic hegemony by going to the opposite extreme and proclaiming that the Internet and just-in-time inventories had rendered recessions a thing of the past. Now, however, we live once again in a world where all economic news is bad news.
Case in point: Federal Reserve Chairman Alan Greenspan testified yesterday before the Senate banking committee. He observed that "the economy has continued to expand." He said the "mildness and brevity" of the post-Sept.-11 recession "are a testament to the notable improvement in the resilience and flexibility of the U.S. economy." He said,
the fundamentals are in place for a return to sustained healthy growth: Imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending as well as potential relief from cost and price pressures.
That's good, isn't it? True, "a surge in household spending early in this recovery is unlikely." But that's only because consumer spending didn't decline during the recession, hence failed to create pent-up demand. Overall, Greenspan predicted that U.S. gross domestic product, adjusted for inflation, would increase by at least 3.5 percent and that unemployment would drop to 5.5 percent or less, even though not too long ago 6 percent (about where it is now) was widely regarded as the permanent floor for unemployment in the United States.
After Greenspan delivered this favorable assessment, stock prices fell. To be sure, Greenspan had dedicated some of his testimony to a headline-generating denunciation of the "infectious greed" evident in recent corporate accounting scandals. But according to the New York Times' Floyd Norris,
it may not have been his views on the speculative excesses of old that affected share prices. Instead his upbeat assessment of the current economy paradoxically may have hurt prices. There was no hint that the current stock market decline would lead the Fed to ease credit again next month, as some had hoped. Instead, Mr. Greenspan seemed to indicate that the next move in rates would be up, although he did not appear to be warning that such a move was imminent.
Let's see if Chatterbox has this right. When Greenspan says the economy is doing poorly, that's bad news. And when Greenspan says the economy is doing well … that's bad news, too.