The not-so-jobless recovery

The Worker Rally October 9, 2006; Page A18

The Labor Department released its September jobs report on Friday, and some wags are calling it the "whoops" report. The "whoops" is a reference to the upward revision of 810,000 previously undetected jobs that Labor now says were created in the U.S. economy in the 12 months through March 2006.

So instead of 5.8 million new jobs over the past three years, the U.S. economy has created 6.6 million. That's a lot more than a rounding error, more than the number of workers in the entire state of New Hampshire. What's going on here?

Our hypothesis has been that, due to the changing nature of the U.S. economy, the Labor Department's business establishment survey has been undercounting job creation from small businesses and self-employed entrepreneurs. That job growth has been better captured in Labor's companion household survey, which reported 271,000 new jobs in September after 250,000 new jobs in August, and a very healthy total of 2.54 million new jobs in the past year.

The household survey is what is used to determine the unemployment rate, which fell in September to 4.6%, the lowest level in five years. The establishment survey, meanwhile, is used to announce the monthly "new jobs" numbers. Every year the Labor Department revises its job estimates from the previous year, in essence reconciling the figures from the two surveys, and the missing 810,000 jobs was the result through March 2006.

Getting out of the statistical weeds, the news here is that the U.S. has a very tight labor market -- which is now translating into significant wage gains. Over the past 12 months wages have climbed by 4%, which is the biggest gain since 2001 and which economist Brian Wesbury points out is higher than the 3.3% average annual wage growth of the last 25 years.

Most of the media has ignored all this and instead focused on the disappointing 51,000 "new jobs" number from the establishment survey for September. But even in that survey, the jobs number for August was revised upward by 62,000 and the U.S. jobs machine continues to roll out an average of about 150,000 additional hires each month. Even the loss of residential construction jobs in September, due to the housing market slowdown, was nearly matched by payroll gains in commercial construction.

This boom in employment started in August of 2003, roughly coincident with the economy's growth acceleration in the wake of the Bush Administration's 2003 tax cuts on dividends, capital gains and in the top marginal income rate on the highest earners. Yet on the same day that the Labor Department discovered 810,000 new jobs, Nancy Pelosi promised that if she becomes Madam Speaker next year, within 100 hours of taking the gavel the House will vote to repeal those tax cuts and raise the minimum wage. Never underestimate the ways that Washington politicians can do economic harm.

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Net Payments - but what does it really mean?

U.S. Foreign Debt Shows Its Teeth As Rates Climb

Net Payments Remain Small But Pose Long-Term Threat To Nation's Living Standards

By MARK WHITEHOUSE September 25, 2006; Page A1

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.

Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.

The gap is still small within the context of the $13 trillion American economy. And the trend could reverse if U.S. interest rates decline. But economists say America's emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards -- or cut back sharply to pay down the debt.

"Our net international obligations are coming home to roost," says Catherine Mann, a senior fellow at the Institute for International Economics. "It's as if on our personal MasterCards we have run up large obligations and never had to make payments. You can't believe that's going to last forever."

If the trend persists, it could also raise concerns about the nation's creditworthiness, putting pressure on the U.S. currency. "It's an additional challenge for the dollar," says Jim O'Neill, chief economist at Goldman Sachs in London. "Economists have been warning about this for so long that people have gotten bored, but now we're starting to see the deterioration."

Since the end of 2001, when the current economic expansion began, the nation's consumption, investment and other outlays have exceeded income by a cumulative $2.9 trillion -- the largest gap on record. That current-account deficit contributes directly to the nation's total foreign debt, the value of all the U.S. stocks, bonds, real estate, businesses and other assets owned by non-U.S. residents. As of the end of 2005, total U.S. foreign debt stood at $13.6 trillion -- or about $119,000 per household. Net foreign debt, which excluded the $11.1 trillion value of U.S.-owned foreign assets, was $2.5 trillion.

Exactly how the U.S. has managed to load on so much debt without seeing its net payments rise remains something of a mystery. Even in the second quarter, the U.S., in effect, was paying only a 0.4% annualized interest rate on its net debt. "It's still quite a good deal," says Pierre-Olivier Gourinchas, an economics professor at the University of California, Berkeley.

In a recent paper, Harvard economists Ricardo Hausmann and Federico Sturzenegger went so far as to suggest that the U.S. might not be a net debtor at all. Instead, they surmised, the U.S. might actually have income-producing assets abroad, such as know-how transferred to foreign subsidiaries, that have evaded measurement -- assets they call "dark matter," after a similarly elusive quarry in physics. Mr. Sturzenegger says the latest data haven't changed his view.

Most economists, however, see a more prosaic explanation: Foreigners have been willing to accept a much lower return on relatively safe U.S. investments than U.S. investors have earned on their assets abroad. Take, for example, China, which since 2001 has invested some $250 billion in U.S. Treasury bonds yielding around 5% or less -- part of a strategy to boost its exports by keeping its currency cheap in relation to the dollar.

By contrast, U.S. direct investments abroad -- which would include things like glass maker Corning Inc.'s liquid-crystal display plants in Taiwan or Intel Corp.'s chip-making subsidiary in Ireland -- have returned an average 8% since 2001, according to U.S. Commerce Department data. Meanwhile, U.S. investors in emerging-market stock funds earned an average annual return on their investments of 22.3%, according to financial-research firm Morningstar Inc. (The Commerce Department counts only part of that as income).

Because the U.S. has tended to borrow in bonds and similar interest-bearing instruments while investing in stocks and longer-term foreign projects, it has benefited vastly from the low interest rates of recent years. "The U.S. has been exceptionally lucky," says Goldman's Mr. O'Neill, "It's like the world's biggest hedge fund. It's borrowing cheap money and getting leveraged returns from the things it's investing in."

Foreigners' willingness to lend at low rates has also encouraged Americans and their government to borrow and spend. By buying U.S. Treasurys, foreign investors put up more than four-fifths of the $1.3 trillion the federal government has borrowed since 2001 to help pay for tax breaks, the new Medicare prescription-drug benefit and wars in Afghanistan and Iraq. Over the same period, foreigners put more than $700 billion into various types of U.S. mortgage-backed securities, providing the money for millions of Americans to buy new homes -- or extract cash from their existing homes to spend on goods such as washing machines and Hummers.

Now, the interest-rate picture is changing. Long-term rates remain low, but the Federal Reserve has raised short-term rates to 5.25% from a low of 1% in June 2004. As a result, payments on U.S. government debt, much of which is short-term, have risen. In the second quarter, for example, the government's debt payments to foreigners rose 10% to $36 billion, accounting for most of the change in the balance of income.

The nation's growing debts have made its finances more vulnerable to interest-rate changes. Cedric Tille, an economist at the Federal Reserve Bank in New York, estimates that a mere one-percentage-point rise in the relative return on U.S. foreign debt would increase the country's net debt payments by 1.1% of gross domestic product. Back in 1995, when the U.S.'s foreign liabilities were smaller, the effect would have been only half a percentage point.

Even without any major changes in rates, economists expect the burden of foreign-debt payments to rise. Estimates of that burden 10 years from now range anywhere from 0.5% to 2% of GDP, depending largely on whether the U.S. manages to curb its current-account deficit. If the deficit expands significantly and the U.S. stops earning a premium on its investments abroad, the burden could reach 5% of GDP, according to calculations made by John Kitchen, an economist in the White House's Office of Management and Budget.

The size of the nation's debt payments matters because it represents a share of income that American consumers, companies and government won't be able to spend or save. The higher the debt payments, the harder it will be for the U.S. to prosper.

"Your standard of living is going to be reduced unless you work much harder," says Nouriel Roubini, chairman of Roubini Global Economics. "The longer we wait to adjust our consumption and reduce our debt, the bigger will be the impact on our consumption in the future."

To be sure, by some measures the U.S. foreign debt is still relatively manageable. As a share of GDP, for example, the nation's net debt stood at about 20% at the end of 2005, compared with the 15% average of the 12-nation euro zone. The United Kingdom's net debt is 17% of GDP. Mexico's is 44%.

Among economists' biggest concerns, though, is the fast pace at which the U.S. is accumulating new debt. As that leads to larger interest payments, it will make the current-account deficit harder to control -- a vicious cycle that could accelerate if worried foreign investors demand higher interest rates to compensate for the added risk.

"You end up having to pay more and borrow more," says the University of California's Prof. Gourinchas. "Things could get out of hand very quickly."

Write to Mark Whitehouse at mark.whitehouse@wsj.com¹

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The Future of Freedom

Supply Side 300,000,000

By STEPHEN MOORE October 3, 2006; Page A26

The Census Bureau tells us that some time in the weeks ahead the U.S. population will reach 300 million. This means that there will be roughly three times as many people as there were a century ago, and twice as many as in 1950. Americans have been bringing a new baby into the world roughly every eight seconds and a new immigrant arrives every 30 seconds -- the equivalent of a new Chicago every year.

This demographic milestone is not cause for alarm -- as some prophets of doom would have it. Rather, it is cause for celebration. We 300 million Americans are on balance healthier and wealthier and freer than any population ever: We breathe cleaner air, drink cleaner water, earn higher incomes, have more leisure time, and live in less crowded housing. Every natural resource we depend on -- water, food, copper and, yes, even oil -- is far more abundant today measured by affordability than when our population was 100 million or even 30 million.

Thanks to the rapid pace of technological progress, there's every reason to believe these resources will be still more abundant when our population reaches 400 million -- which should happen about 40 years from now. As the late economist Julian Simon reminded us, thanks to our free market capitalist system, the history of America is one of leaving the storehouse for every successive generation more endowed with wealth, knowledge and natural resources.

Yes, skeptics will ask: What about the inevitable headaches of crowded classrooms, highways and all the other problems associated with more people sharing a finite land area? In the short term, more people can mean more congestion. But anyone who has bothered to look out the window of a plane on a trip from the West to the East Coast knows that America remains a vast, unpeopled land. Texas alone is so large that we could put every U.S. family of four in the state and give them two acres to call their own -- and the rest of the country would be deserted. Our farmers grow about three times as much food on one-third as many acres and a third fewer man-hours as 75 years ago -- and we have the technological capacity to feed a population many multiples of what we have today.

Our population is rising mainly because early childhood death rates in the U.S. have fallen by 90% in the last century, and continue to fall: A child born today in the U.S. is four times more likely to live to adulthood than one born in 1950, and 12 times more likely than one born in 1900. And these children will live longer, as the nearby chart shows. Life expectancy has increased by more than 30 years in the last century.

This good news is an eloquent rejoinder to 40 years of seemingly endless jeremiads issued by neo-Malthusians from Paul Ehrlich to Al Gore. In the early 1970s, when the U.S. head count was one-third less than today, the then-president of the World Bank, Robert McNamara, famously proclaimed that overpopulation was a danger on par with nuclear war. Many highly credentialed demographers actually compared uncontrolled human copulation with the reproduction behavior of Norwegian field mice. School children in the 1960s and '70s were warned that an impending nightmare of geometric population growth would mean standing room only on the globe and the need to wear gas masks to breathe.

Instead, as nations have grown richer over the past 50 years, birth rates around the globe have fallen by half. Human beings don't breed like field mice -- they can and do control their fertility. Ironically, even Thomas Malthus came to realize that humans control their breeding as a result of the "superiority in their reasoning faculties" and a capacity to "calculate distant consequences."

Apocalyptics in the Club of Rome -- who complained that America has the "grossest national product" and whose famous screed, "The Limits to Growth," asserted that economic growth could not continue because of limited natural resources -- were wrong. Growth brought about through the free market isn't a planetary curse at all, but rather the ultimate contraceptive and ecological protector.

Sadly, many policy makers still believe in the science fiction of overpopulation. The alleged threat of "too many Americans" crowding the country is one of the reasons that many in Congress want to build a wall around the U.S. to keep out immigrants. But even with continued immigration, the U.S. population is expected to grow for the next 50 years and then stabilize. By contrast, Japan and many European nations are expected to experience a debilitating absolute decline in their populations by between 10% and 25% over the next 50 years. Fortunately, the combination of immigration and slightly higher birth rates in the U.S. will help us avert that kind of population implosion here.

"Americans are the first best hope for the human race," as the historian Paul Johnson put it. That there are now 300 million of us -- and growing -- suggests that the future of freedom is in good hands.

Mr. Moore is a member of The Wall Street Journal's editorial board.

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Corruption, but of course!

Is Brazil Nuts -- Or Just the System?

By MARY ANASTASIA O'GRADY September 29, 2006; Page A17

"Corruption is a regular effect of interventionism."

-- Ludwig von Mises "Human Action," 1949

As Brazilians go to the polls on Sunday to elect a president for the next four years, most pundits are hedging their bets as to whether Luiz Inácio "Lula" da Silva of the Workers' Party (PT) can win re-election in the first round of voting.

A serious allegation of fraud inside the Lula campaign has become the main issue in the race over the past two weeks. Added to a host of other corruption charges implicating PT members close to the president in the past year, this latest scandal has the potential to force a run-off.

Lula may well be innocent, as he claims, of any involvement in the plethora of scandals now swirling around his party. But it is also true that if corruption has blind-sided him, he has only his own politics to blame. It has been the life work of Brazilian socialists -- of which the PT are among the most hardcore -- to empower the state, without limits, as an enforcer of "social justice" through the wholesome work of politicians and bureaucrats. Now they are reaping what they've sowed: a system that breeds corruption by its very nature, as von Mises warned more than a half-century ago.

The odds of a run-off remain slim. On Wednesday polling companies Datafolha and IBOPE released polls that suggest, after statistically adjusting for nullified ballots, that Lula will finish with 53% of the vote versus 35% for his next closest challenger, the two-term governor of São Paulo, Geraldo Alckmin. Yet with mud from scandal splashing higher every day, Alckmin supporters are holding onto the hope that Lula will fall short of the 50% plus one needed to avoid a second round.

Even then, an incumbent victory is fully expected. Lula is a charismatic populist who, in his first term, had enough common sense to avoid messing with the macroeconomic stability he inherited from predecessor Fernando Henrique Cardoso. He has also raised the minimum wage and expanded the welfare rolls to solidify his base. Brazil's majority poor heavily favor him.

Yet real damage may have been done to his second term. Even if he wins in the first round, the hard-left PT is expected to lose seats in the congress; if that happens, Lula will likely have to give up cabinet posts to coalition allies. While the PT is not the only party in Brasilia tarnished by charges of gross dishonesty, in recent years it seems to have elevated to an art form sophisticated practices of vote buying in congress, kickbacks on government procurement and, most recently, a fraudulent plan to commission and purchase a fake report designed to frame a political rival.

Brazilian disgust with the political class is widespread these days, but one wonders whether the more profound lesson is being learned. Long before von Mises wrote his masterpiece "Human Action," Founding Father James Madison warned that governments without limits are bound to become abusive. "All men having power ought to be mistrusted," he wrote. "If angels were to govern men, neither external nor internal controls on government would be necessary."

Brazil's runaway corruption is not due to an unusual collection of greedy politicians in Brasilia. Indeed, it is likely that Brazilian politicians, like their American counterparts, fit well within the bell curve when it comes to human frailty. The trouble is that under the 1988 constitution, mere mortals are trusted to behave like angels.

The constitutional project began in 1987 with good intentions. Fundamentally, it was an attempt to right the wrongs of the military government by securing democracy. But when socialist ideologues piled into a room with an untold number of narrow special interests, the outcome was a roadmap to tyranny, no longer with guns but with the "law." As Mr. Cardoso recalled in his memoir, "Brazil was trying to create a welfare state at the precise moment in history when the welfare states of Europe were collapsing."

Slow economic growth and corruption are but two offspring of the monster government in Brasilia that has badly damaged Lula's legacy. Von Mises predicted it: "The advocates of interventionism pretend to substitute for the -- as they assert, 'socially' detrimental -- effects of private property and vested interests the unlimited discretion of the perfectly wise and disinterested legislator and his conscientious and indefatigable servants, the bureaucrats." In the world of the anticapitalists, he explained, "only those on the government's payroll are rated as unselfish and noble."

Von Mises anticipated the outcome: "Unfortunately the office-holders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses, or -- sometimes -- considerable gains." In other words, buying influence is normal when influence has a cash value. This is what one Brazilian family did when it allegedly paid kickbacks to politicians who helped it secure contracts for medical equipment.

Such simple observations from classical thinkers have been routinely dismissed as "ideological" by both Latin American socialists and fascists -- that is, by the left and right. Yet the wisdom has proven timeless and universal, and there is no shortage of oppressed citizens who can attest to its veracity. At a World Bank panel to discuss corruption last week, Dele Olojede (an award-winning journalist from Nigeria) had this to say about the problem: "We should recognize that in societies where the bureaucracy is vast, the press is weak, the private sector operates under the yolk of government, these are the clearest indications of corrupt societies, and you cannot begin to fight corruption if you have all powerful government in any society."

Whether or not the equality of outcomes sought by the Brazilian Constitution is morally defensible, experience shows that the power required by the state to achieve it produces highly undesirable consequences. Despite all of socialism's moralizing, when those clamoring for justice make their way to the seat of unchecked power, a portion of them turn out to be no better than their predecessors. Do-gooders too have clay feet. It is a lesson Brazil is learning the hard way.

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Humanity's Greatest Achievement

Humanity's Greatest Achievement

By JOHAN NORBERG October 2, 2006; Page A11

Think for a moment about what this morning would have looked like if it were 150 years ago. You wouldn't have had electric light, running water or indoor sanitation. You couldn't have gone to work by car, bus or train. You couldn't have used a computer, which performs calculations in seconds that would take decades with pen and paper. In short, you would probably not have found this morning very comfortable or enjoyable -- if you had been alive to experience it. Back then, the global average for life expectancy was around 30 years.

We tend to take our opportunities for granted, but our ancestors could not have imagined what we now have. In the last 100 years, we have created more wealth than in the 100,000 years before that, and not because we work more. To the contrary: In the last century, work hours have been halved in the Western world. It is because new ideas have made it possible for us to work smarter and find easier ways to satisfy our needs and demands.

The people we should thank are the innovators and entrepreneurs, the individuals who see new opportunities and risk exploring them -- the people who find new markets, create new products, think out new ways to handle commodities commercially, organize work in new ways, design new technology or transfer capital to more productive uses. The entrepreneur is an explorer, who ventures into uncharted territory and opens up the new routes along which we will all be traveling soon enough. Simply to look around is to understand that entrepreneurs have filled our lives with everyday miracles.

Entrepreneurs are serial problem-solvers who search out inefficiencies and find more practical ways of connecting possible supply with potential demand. In that way, they constantly revolutionize our economy, and have made it possible for average people today to live longer and healthier lives, with more access to technology than the kings had in previous generations.

Had this radical improvement of our lives been accomplished by political leaders and central planning, it would have been celebrated as humanity's greatest achievement. But that is not how entrepreneurs are perceived, to say the least. For a hint of how the popular culture thinks of the innovators, take a look at any Hollywood film. Chances are that the villain is either a mad scientist or a greedy businessman. That is slightly ironic, since we would have neither film technology without scientists nor a film industry without businessmen. This is to say nothing of our political culture.

The ingratitude toward those who have given us almost everything seems strange. But perhaps there is a historical explanation. Wealth and innovation are recent phenomena. During about 3,999,800 of the perhaps 400 million years that hominians have existed, life has been a zero-sum game for most people. The invention of new technology was extremely slow and there was no surplus to invest, so the average homo habilis or homo erectus didn't see an increase of wealth during his lifetime. What other tribes hunted or gathered, you lost. If someone gained, it was reasonable to be suspicious of him -- because he probably did it at your expense. Under such circumstances, human nature, our instincts and our attitudes, developed.

Today we live in a very different world. The system of reward in the free market is the complete opposite. You don't gain by stealing from others, but by giving them goods and services that they want. Our suspicion and our envy, however, remain the same. What was once a way to avoid being exploited by brutes, kings and knights now becomes a way of exploiting those who create new value.

So we are probably not well adapted to understand the modern economy. Whenever we see wealth we have gotten used to thinking that someone somewhere else has lost out. The history of socialism can be interpreted in this light. Marx said that the wealth of the capitalists came at the expense of the workers. But even in his lifetime, the average worker in Britain increased his income threefold. Then Lenin saved socialism by saying that the original hypothesis might be wrong, but only because someone else had to pay the price -- poorer countries that were exploited by trade and investments. Today, once again, we know that the opposite is true. Since 1950, extreme poverty has been reduced to 20% from 60% in developing countries. The reduction has been led by the countries that have the most trade and investment links with us, whereas those that have been shut out, such as sub-Saharan Africa, have stagnated.

Later, socialists like the economist Robert Heilbroner admitted that capitalism and trade were superior for creating wealth, even for developing countries, but stood by the basic conclusion that someone or something must lose. Heilbroner thought the environment would. Today most people realize that wealth and technology give countries both the will and the means to deal with environmental problems, and that the worst problems are those in poor nonmarket economies -- the fact that five million people die every year from unsafe water, for example.

That the anticapitalists' particular concerns have been proven wrong again and again doesn't help for long, because soon they find a new excuse to condemn free markets. The latest variety is Marx on his head: He said that capitalism is bad because it actually creates poverty and slavery. Today, critics say that capitalism creates wealth and freedom -- but this is bad for well-being because we become stressed up, frustrated by the constant demand to choose, working too hard and consuming too much to keep up with the Joneses.

Don't expect the critics of capitalism to change their minds any time soon. As long as they don't believe in the creative ability of mankind or that the market is a plus-sum game, they will continue to think that someone, somewhere, is victimized whenever and wherever we see growth and innovation. Unless this disparagement of entrepreneurs is tamed, people will allow government, with its arsenal of taxes and regulations, to take their place.

Mr. Norberg, a senior fellow at the Center for the New Europe, is author of "In Defense of Global Capitalism" (Cato, 2003).

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