THE ENTERPRISE--Not so bad...

THE ENTERPRISE

Americans are of the opinion that the Bush administration is doing a terrible job with the economy. They are about half right. It is doing a poor job in many areas, and with Congress help, and the lack of presidential vetos, they are spending us into a big hole.  BUT... all the media attention to how badly the average American is faring, how the middle class is disappearing, or suffering, or whatever paints a distorted picture.   This week, I drew on an assortment of sources that create a different, and more positive picture.  The constant revisions to government statistics, some of which are so large that the entire impression formed can change, makes it important to consider a wide range of sources in forming our opinions.  Here's where I came out.

We aren't so bad off, after all….
“Americans' incomes are far better than the data indicates,” says Thomas Sowell, the widely regarded academic and fellow at the Hoover Institution.  He contends that the media is more concerned with “scoring points” by sensationalizing stories than telling the truth.  In evidence he cites a book “Myths of Rich and Poor” by W. Michael Cox and Richard Alm.  I have not read the book, so I can't vouch for its accuracy or merit, but there are some indisputable facts that argue in Sowell's favor.

Look what we have…
Americans are somehow consuming more than ever.  Americans have more of the “luxuries and creature comforts” than ever before. In 1970, 33% of American homes had central heating AND air conditioning.   By the 1990's, 80% had both.  Only 25% of Americans had a dishwasher in 1970, but by the 1990s, it was more than half.  And 98% of households had color TV in the 1990s compared to 34% in the 1970s.   If Americans income and standard of living are declining, how can this be, even if these notable amenities are less costly now than they were 2+ decades ago?

But the key measures are flawed…
Partly, it could be that the Consumer Price Index (CPI) against which wages are being compared is flawed and overstates real inflation.  It actually is believed by no less authorities than Alan Greenspan and Michael Boskin (former Chairman of the Council of Economic Advisers to the President) to overstate inflation by as much as 1-1.5%.  If we take the lower number of 1% error and compound that over 25 years, the error created equates to an understatement of $9,000 in annual income, or if both partners in a household are working, $18,000!  Maybe the decline in American incomes isn't as bad as we think after all.

Even the auto industry is growing…
But look at what's happening to the auto industry and its workers.  The production of autos in the US isn't dropping any more-it's growing, thanks to the many new plants being built by (foreign owned-Toyota, Honda, Nissan, Subaru, Hyundai, Kia, BMW, Mercedes, etc.) auto “newcomers,” who employ a lot of US workers.   This employment is not far below the UAW wages either, and if the cost of living in southern states is compared to the upper Midwest, and union dues are taken out, the new auto plants wages are pretty competitive.  Even benefits aren't far off.  What are a lot different are the legacy costs of retirees and non-working people still receiving full pay.

But it is changing hands…
Car production is changing hands and growing in the US at this very moment.  Productivity and the nature of work has changed too, thanks largely to the (Japanese led) lean production methods and new equipment technology building cars with more robust designs that aid in the production processes and hold up better too.  No doubt, the pain of unemployed old-time auto workers is as great as ever, but overall, the American auto industry is far stronger and employs far more Americans than most of us realize-until we look into the facts, something we'll never hear in the mass media.

Manufacturing is even growing…
In fact, overall manufacturing output in the US is up 12% from 2002, with the largest gains coming in the places you'd expect them: business equipment (+26%), information processing (+47%, defense (+31%), and so forth.  There is little doubt that the makeup of the US industrial base has changed dramatically, and that the kinds of jobs available are also much different.  But the stories of our demise as an industrial power are premature and exaggerated for media hype value.

And our economy is stronger than we realize…
I could cite statistic after statistic showing why the US economy is a lot stronger than we are led to believe, but those who want the gory details can read Business Week's cover story in its Feb. 13, 2006 issue: “Why The Economy Is a Lot Stronger Than You Think.”  The bottom line reason is that all the measures we use are old-economy measures that ignore the billions of dollars of knowledge-based enterprises.  These numbers exclude most of the newer innovations so grossly that it would be funny if it weren't so sad.  You see, machines and buildings are easy to tally, but innovation/information based intangibles are hard to measure, so they are either excluded or mis-cast as old-economy widgets.

But once again, our measures are the wrong ones…
Examples are staggering.  Apple's innovation that led to the iPod (40 million imported and sold) and iTunes (the largest seller of music) and “podcasting” (the hottest new media format) don't get counted as contributing any value to the GDP.  Just the value of the iPods as imported goods gets counted.  I read somewhere recently that Microsoft's software CDs move through the system as “Plastic parts, NOI” (Not Otherwise Indexed).  I don't know if that's true, but if it is, it is one of the most egregious errors in our GDP calculation.  The Microsoft software is the single most expensive part of any computer these days-more than Intel's microprocessor chip, more than Samsung's liquid crystal display and way more than Dell's assembly labor.

And we need to change them…
R & D spending doesn't count as an investment but capital spending does.  But these days at a company like P & G, where R & D spending is up 39% in the past 10 years, while capital spending is flat!  Why do we tolerate such incredible errors in our most basic national economic indicators?  Because they can't agree on how to change the old metrics and how to value intellect, education, information and innovation, that's why.  Businesses figured out long ago that there was a big difference between “expense spending” and “investment spending.”    The government is still mired in the past and we are making huge decisions based on obsolete information.

But most of all, we need to realize what's going on…
Enough of this stuff.  Where am I going with all this?  I want to hammer home the point that we-the American people-are being grossly misled about our economic well being (and on many things as well).  Some of it is media hype.  Some of it is archaic government statistics, which are still so flawed that initial figures are often revised dramatically just a month later-after everyone has “reacted” to the wrong indices. 

And capitalize on the change, not “wring our hands” about it…
What can we do?  Try hard to understand it all.  Look past the erroneous impressions and wrong-headed indicators and see what is really happening.  It is called “change” by all, and “progress” by many.  It is inevitable and it is a force for good, not evil. But it is up to us to understand what is happening and to manage this omnipresent change.  In change lies opportunity.  Seize it.   Capitalize on it.  And do it now, before someone else does it first.  Our lives and our country are depending on … us.

Best, John