Four Wrong Reasons for Pessimism

Forbes.com

Rich Karlgaard

If you think a U.S. recession is here or imminent, you're in good company. Most Intrade bettors believe this and probably 99% of journalists and all Democratic office seekers do, too. We'll soon see. For now, I still say the 2008 U.S. recession is oversold. Why the widespread recession fear when unemployment is low, interest rates are low and the Fed is on the case?

I submit there are four false reasons behind the unnecessarily grim outlook for the economy. All of them get a lot of attention. But they can be safely dismissed.

President Bush's unpopularity. George W. Bush is stuck with a 30% approval rating. It's nearly impossible to see what might lift Bush's rating during the 11 months remaining in his presidency. Seventy percent disapprove of the Bush presidency (or are undecided) and, amazingly enough, that's the same percentage as those who say America is on the wrong economic track. Does that too tight correlation make you suspicious? It should. When asked about their own individual economic prospects, half of Americans say they feel positive about the future. About their lives, 84% say they are satisfied. So which numbers should you believe--the 70% who say the whole country is on the wrong track, the 50% who are rosy about their own economic futures or the 84% who report themselves satisfied?

I think the 50% and 84% are more telling figures. The 70% who say the country is on the wrong economic track are merely expressing their Bush fatigue.

Presidential election year. This is the most compelling presidential primary season in memory. By far the superior drama is the Democratic race … and it is going down to the wire. The press coverage is huge. Both Democratic candidates describe the U.S. economy as in terrible shape.

If you belong to the out party--this year, the Democrats--your gambit is always to say the economy is in bad shape. You need a justification for change. In 1992 Bill Clinton's campaign slogan was: It's the economy, stupid. In 1980 Ronald Reagan asked Americans if they were better off than they had been four years earlier. The out party will always justify its challenge on the basis of a weak economy.

This year the out party, the Democrats, is giving us more drama, which gets more attention in the press. Thus, their negative economic outlook gets more attention.

Business press incompetence and fear. Want to know the truth about business journalists? Most of us are failed sportswriters. There are exceptions, and a good many are found between these pages and at Forbes.com. Think about what it takes to be a first-rate business journalist. One must be facile with numbers and financial statements and have the confidence to talk to CEOs, high-level executives, board members, analysts and so forth. One must delve deeply into the industry one writes about--what is the competitive landscape, what are the technological disruptions on the road ahead? It is also critical that one have a coherent global economic view to be able to put a story into context. And one must be a good storyteller.

Now, if one possesses all of these talents, what are the chances one goes into the low-paying field of journalism? Not great. One instead becomes a Wall Street analyst, a Booz Allen consultant or just goes into business, perhaps to raise money and start a company. Low-paying journalism can't compete for pick of the litter. (Unless it's Forbes, where journalists flock to a higher moral purpose!)

The thin talent pool in business journalism combines with two other forces: Journalism is populated by left-of-center people, many of whom are hostile to business; and traditional journalism itself faces threats of disruption from the Internet, leaving business journalists in a fearful mood, which gets projected into their stories.

Trouble with numbers. When reading about any business problem or challenge, how often do you see the problem stated in relative terms? For example, what dampens spirits today? The subprime mortgage mess. How big a problem is this? No one really knows, but so far banks have written off about $150 billion in bad loans. Now, $150 billion sounds huge. But it is only 1% of America's annual GDP. It is also less than 1% of the market capitalization of U.S. stocks. In any typically volatile trading day U.S. stocks gain or lose $150 billion every hour. How often does one hear that?

"Surely that $150 billion will grow," you say. No doubt. Let's say the amount of bad paper doubles or triples. Would that finally bring the U.S. economy to its knees? I don't think so. The nearest historical comparison we have is the savings-and-loan crisis of 1986--95. On a constant dollar basis--so we can compare apples with apples--the S&L crisis saw $700 billion in bad loans. Nearly five times as much as we've seen in the subprime mess so far.

The S&L crisis caused some damage, to be sure. But during the 1986--95 period the U.S. economy grew and stocks went up. We survived stock shocks in 1987 and 1989 and a mild recession in 1990. The country did not collapse into a 1930s-like depression.

The financier George Soros calls today's credit crunch the worst global financial crisis since World War II. He's wrong. See the second reason for the explanation.