Almost two weeks ago, in the Monday, June 30 edition, the Wall Street Journal published an editorial entitled "There Is No 'The Economy,'" by Zachary Karabell, President of River Twice Research.
Perhaps the most interesting example of Mr. Karabell's point is this passage,
"To begin with, someone in the upper-income brackets is living a different life than those in the lower-income brackets. The top 20% of income earners spend more than the lower 60% combined. The wealthiest 400 people have more than $1 trillion in net worth, which exceeds the discretionary spending of the entire federal government. These groups are all American, yet it would be stretching the facts to the breaking point to assert that they share an economic reality. On the upper end, the soaring price of food and fuel hardly matter; on the other end, they matter above all else. The upper end does matter quantitatively, but the group of people on the lower end is vastly larger and therefore has more resonance in our public and electoral debate.
Look at housing, widely regarded as a national calamity. The regional variations depict something different. In Stockton, Calif., one in 75 households are in foreclosure; in Nebraska, the figure is one in every 1,459; and the greater Omaha area is thriving. Similar contrasts could be made between Houston and Tampa, or between Las Vegas and Manhattan. Home prices have plunged in certain regions such as Miami-Dade, and stayed stable in others such as San Francisco and Silicon Valley. Houston, bolstered by soaring oil prices, has a 3.9% unemployment rate; the rate in Detroit, depressed by a collapsing U.S. auto industry, is 6.9%. The notion that these disparate areas share a common housing malaise or similar employment challenges is a fiction."
Doesn't this explain why we don't seem to be in a recession? As Mr. Karabell points out, it would take a major economic problem to plunge enough of us, as consumers, into an American-wide recession. Sure, pockets are hit hard, income-wise and geographically. But hardly the entire nation.
He goes on to note,
"We hear continual stories of the subprime economy and its fallout on Main Street and Wall Street. All true. Yet there is also an iPhone economy and a Blackberry economy. Ten million iPhones were sold last year at up to $499 a pop, and estimates are for 20 million iPhones sold this year, many at $199 each. That's billions of dollars worth of iPhones. Add in the sales of millions of Blackberrys, GPS devices, game consoles and so on, and you get tens of billions more.
The economy that supports the purchases of these electronic devices is by and large not the same economy that is seeing rampant foreclosures. The economy of the central valley of California is not the same economy of Silicon Valley, any more than the economy of Buffalo is the same as the economy of greater New York City. Yet in our national discussion, it is as if those utterly crucial distinctions simply don't exist. Corn-producing states are doing just fine; car-producing states aren't.
The notion that the U.S. can be viewed as one national economy makes increasingly less sense. More than half the profits of the S&P 500 companies last year came from outside the country, yet in indirect ways those profits did add to the economic growth in the U.S. None of that was captured in our economic statistics, because the way we collect data – sophisticated as it is – has not caught up to the complicated web of capital flows and reimportation of goods by U.S.-listed entities for sale here."
To me, this seems crucial as we read and hear about various companies thriving or doing poorly in the last twelve months, or the next twelve. Different sectors of our economy are, in fact, seeing different conditions and having different financial performances.
Finally, to conclude and reinforce his point, Karabell writes,
"In truth, what used to be "the economy" is just one part of a global chess board, and the data we have is incomplete, misleading, and simultaneously right and wrong. It is right given what it measures, and wrong given what most people conclude on the basis of it.
The world is composed of hundreds of economies that interact with one another in unpredictable and unexpected ways. We cling to the notion of one economy because it creates an illusion of shared experiences. As comforting as that illusion is, it will not restore a simplicity that no longer exists, and clinging to it will not lead to viable solutions for pressing problems.
So let's welcome this new world and discard familiar guideposts, inadequate data and outmoded frameworks. That may be unsettling, but it is a better foundation for wise analysis and sound solutions than clinging to a myth."
As business people, Mr. Karabell's viewpoint is enormously important to understand. Simply reading US macroeconomic statistics doesn't really capture what is happening to the wealth and incomes of our country anymore. So much of our economic welfare is intentionally tied to other people in other parts of the globe.
What, in my youth, was taught as a sort of minor external 'leakage,' foreign investment, sales and purchases, is now critical to a US economy which deliberately constructs supply chains across the globe.
It also means we should be wary of declaring recessions, or even widespread US economic trouble, on the basis of economic measures which, as Mr. Karabell observes, reflect a now-vanished, insular US economy in which personal incomes and wealth are closely aligned with those of domestic production activity.