Defending the virtues of liberty, free markets, and civilization... plus some commentary on the passing scene.

Freedom's Fidelity

Tuesday, April 13, 2004

Quick, Informal Commentary on the Economy

Just some not particularly bold predictions and thoughts that I wanted to get down, if I'm right, you can be sure I'll revisit this in a few months. So, right now we are hearing a lot about gas prices. National averages are at "record highs," but that's only true in nominal terms. Adjusted for inflation and purchasing power, a 1981 gallon of gas would cost you $2.83 in 2004. But there's less sensationalism when you put it that way. I live about 2 miles out of the Loop, the gas station on the corner is $2.09. The national average is $1.77. Lots of that price is taxes lots of that is environmental regulation, but those costs are pretty well fixed, and thus don't play a facotr in recent increase. Still, I've been hearing plenty of speculation that once the increased summer demand comes we're going to see $3.00 a gallon at the pump. Come to think of it I heard that last year and the year before that. My prediction is that prices may still rise a bit but will fall and level off again to close to what they were last summer.

Here's why: high prices create more incentive to cheat, some members of OPEC will increase production and sell a little more oil for a little less than market value. Companies will also increase production in response to the high price, this includes domestic companies, and those in Canada, our largest foreign supplier. My prediction is that summer gas prices will probably be about what they were last year. (*ahem* ceteris paribus- assuming the situation in the Middle East stays roughly similar to what it is today)

Gas prices in this election, are not much more than transient noise to be sure, but the economy is always a big one, usually the one in fact. This election though, it's riding shotgun. For the record, I think that Bush's tax cuts probably did soften the blow of the recession to some extent, but I subscribe to the belief that the president has very little influence on the health of the economy, especially in the short term. Nevertheless the economy matters politically, politicians can make or break careers on their ability to pass blame when its down, and court credit when its up. The electorate generally gobbles this up, partisanship explains much of this, but it just might be that economic ignorance of the function of markets explains more. Whatever the reason, it matter. A lot.

For the last few months we've been hearing about the "jobless recovery" and that seems to be a longer term characteristic of this recovery. The last few quarters have shown all the signs of solid growth and the end of the recession, but the unemployment number hasn't been shrinking at the rate it was told. Sure, it had fallen to the mid-90's level of 5.6% but that's where it seemed stuck, and actually ticked up to 5.7% in recent weeks. Given the shock of the bursting of the tech bubble, the devastating attacks of 9/11, corporate scandal, and a war, I think our economy (which is just the aggregate of 'us') has shown to be remarkably resilient. Companies had to adjust, and one way they did was to reduce employees and increase their productivity.

Here's some anecdotal evidence: Over the last three years, the department I work in (finance related), has seen better than a 50% increase in business, and we've done this with one less employee. There were some important technological improvements in our workflow instituted that dramatically increased our productivity. We were just asked to work faster and longer if we needed. We all had good job security and even if some of us felt overworked, where were we going to go in this market? I suspect that was how many companies improved their bottom line, and are now a little reluctant to start hiring. Or were, up until last month when the economy added a staggering 308,000 jobs. The most in one month since April 2000.

Demand is finally starting to outpace productivity increases, and businesses believe that demand is here to stay, so they started hiring. All of the blame that democrats have heaped on him for the slumping economy have, once again, created the impression that the president can simply create jobs and wealth with the stroke of a pen. One month is far from a trend, but if one emerges, Bush will happily agree with the Democrats insinuation that he controls the economy and will take credit for the increasingly robust job market. If this happens we could see Bush by K.O. come November.


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