On December 13, my morning was boring enough that I watched former Fed Chairman Alan Greenspan make an appearance on a show that has earned the soubriquet Meet The Depressed.
Like most prognosticators, the once sphinxlike Greenspan's reputation has taken a bit of a hit recently. But since he is a serious student of economic history who was a child during the Great Depression, I wanted to hear his perspective, especially because he can now tell us what he really thinks.
That morning found him, like a growing number of economists, surprisingly upbeat on the nascent recovery from the Great Recession. Companies fired far too many workers during the financial crisis, he declared, and so they are operating at the limits of their capacity, setting the stage for a surprisingly strong potential upturn in employment growth.
Greenspan is hardly alone in his increasingly sunny outlook. The November unemployment figures of 11,000 jobs lost, versus a projection of 125,000 pink-slip recipients, temporarily managed to turn around the dollar's slide and halt the advance in the price of gold.
Accompanied by a downward revision of 160,000 in the number of jobs lost in September and October, there were sudden reasons for optimism. Some economists, like Brian Wesbury, finally found evidence to support the V-shaped recovery they've been forecasting for more than a year.
Still, one or two months of positive economic reports don't mean the coast is clear. Only three months ago, Greenspan himself was voicing dismay about the costs of long-term structural unemployment, as workers see their skills erode in an increasingly dynamic, high-tech economy that leaves them behind.
A lost generation of workers could negatively impact every aspect of the economy, from chronic federal budget deficits to incomes and consumption to productivity and global competitiveness. Undoing the damage may not be so easy. Even if the rebound in 2010 is much better than was anticipated a few months ago, returning the economy to 5.0% unemployment levels requires five years of 5.0% GDP growth, a Black Swan if there was one.
Greenspan's optimism didn't stop with the improving labor markets. The 65% increase in equity prices since March 9 is not just a change in the price of paper, he noted. It's real, and this re-creation of wealth has positive implications for both consumption and investment in the economy.
Again, he's right. But the speed with which that wealth disappeared in 2008-and reappeared in 2009-leaves many suspicious of its trajectory, reminding them of its transitory nature. Furthermore, just as workers unemployed for an extended period lose their skills, many investors-like those who panicked and sold or were overexposed to real estate-experienced long-term wealth declines that won't be so easy to replace.
As we enter a new year there are more reasons to be upbeat than there have been for a few years. But when sober people like Greenspan change their outlooks so far and so fast, count this observer a little dubious that Goldilocks is back.
Evan Simonoff, Editor-in-chief
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