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Jewish World Review Jan. 2, 2001 / 7 Teves, 5761

George Will

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Consumer Reports

Prosperity in perspective -- REGARDING THE ECONOMY, this is a time -- like, come to think about it, all other times, regarding everything -- to remember this: "There are knowns, known unknowns, and unknown unknowns." That axiom (whose author is unknown) is pertinent to the problem of understanding the economy's trajectory, or at least not misunderstanding it too harmfully.

America has just been draped with the journalistic equivalent of black crepe -- stories about the dreadful Christmas shopping season. But the season, although disappointing when measured against expectations, was slightly better than last year's, which was the best Christmas in a decade.

Amid anxiety about a coming recession, unemployment has crept up one-tenth of one percent to . . . 4 percent, a full percentage point below what was, until recently, defined as full employment. The Nasdaq has just had its worst year in its 29-year history . . . and is still 16 percent above where it was two years ago. In America, misery is relative.

Unless you think the economy can, should and will grow at 5 percent forever, it is odd to regret evidence that the economy is on a glide path to 2.5 percent to 3.5 percent growth next year.

And for the president-elect, the slowdown is serendipitous, given his advocacy of an across-the-board tax cut. He can now advocate the cut as a stimulative, countercyclical measure as well as a conservative response to a substantial surplus.

Stock market volatility is not serendipitous for George W. Bush, who hopes to persuade Congress, and the country, to adopt partial privatization of Social Security. Critics will ask: Will the government-approved funds in which individuals will invest portions of their Social Security taxes be more secure investments than, say, AT&T?

Once synonymous with blue chip reliability, AT&T's stock has plunged from $61 to $17 (as of Wednesday) in nine months. Lucent Technologies, the once-mighty equipment firm spun off from AT&T, has issued five profit warnings this year. Peter Goodman of The Post says that this year the market erased $380 billion of worth from Lucent and AT&T shareholders.

The broadening demographics of stock ownership, which now includes more than half of all households, is desirable, not least because it expands the constituency for policies of economic prudence and growth. Yet as participation in the stock market increases, so does the potential for economically destabilizing mood swings in the public.

Some analysts, including Alan Greenspan, believe there is a "wealth effect" -- that consumption increases as rising portfolio values cause consumers to feel more prosperous on paper, thereby producing irrational exuberance among consumers. It is irrational if based on the assumption that paper wealth is permanent.

Greenspan's formula is that every extra dollar of stock market wealth prompts a 3- to 5-cent increase in consumption. And it would seem to follow that, in a society of broad stock ownership, there can be a negative wealth effect -- declining portfolio values cause mutually reinforcing retrenchments that drive the economy down further and faster than underlying realities warrant.

However, Kevin Hassett, resident scholar at the American Enterprise Institute, notes that those who are at least moderately wealthy own most stocks: "The top one percent of equity owners hold about 50 percent of all corporate stock. The top 5 percent own about 80 percent of all stock." But these individuals account for a small share -- perhaps as little as 12 percent -- of society's aggregate consumption. Therefore, Hassett says, it is mathematically implausible to argue that positive wealth effect drove the economy to its heights. Whether a negative wealth effect can of itself cause a downward cascade of effects that result in a recession is a known unknown.

In October, Nokia, the Finnish telecommunications firm, estimated that 400 million cell phones would be sold in 2000, that "in the region of 550 million" more would be sold in 2001, and that sometime during 2002 there would be 1 billion cell phones in use. If so, one in six people on the planet will have such phones. Whether that will come to pass is as yet unknown.

The world's sixth-largest economy, California's, already rocked by the implosion of the dot-com sector, is now running short of electricity. This is because of badly administered and half-hearted deregulation and badly underestimated demand for electricity. The effects of California's woes on the national economy are as yet unknown.

The known unknowns are less worrisome than the unknown sort. But, then, 20 years ago the Internet was an unknown unknown.

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