October 22, 2003

Treasury Secretary John Snow probably did not know the implications of the upward revisions in retail sales for July and August when he declared that economic activity probably expanded more than 4 percent during the summer.  In fact, my estimates now suggest that activity may have increased nearly 6 percent.

What is so remarkable about this performance is the absence of working hours to produce that activity.  Indeed, preliminary estimates of hours worked show the same rate of decline as during the spring. 

This means that productivity may have soared by more than 9 percent during the quarter.  With wages actually declining in the latest month, profits are jumping by more than 20 percent from previous year levels and stock prices are justifiably surging. 

But there is something wrong with this picture. 

Consumers cannot continue their spending spree if they run out of purchasing power.  $400 child tax credit checks and reduced tax withholding put enough money into people's pockets to replace the absence raises, overtime, or, in some instances, even paychecks. 

When these tax reductions are spent, the growth of retail sales will slow.

However, the other problem is in why productivity gains are so strong.

To be sure, some of the productivity gains reflect better tools and better resource management.  Those improvements should persist. 

But capital spending remains modest.  Our work force has not suddenly become more educated.  Few workers are churning out 9 percent more work at annual rates than they did three months ago. 

Instead, we are dumping American workers and replacing them with services purchased from abroad.  Computer help lines are being staffed by workers in Ireland and India.  Computer programming is being written in Asia and delivered to U. S. technology officers over the internet. 

Those high priced American programmers are being dismissed faster than they were being sought three years ago.  More than 120,000 programming jobs have disappeared in the past year.  Even the previously coveted system design computer jobs have fallen by more than 30,000 since this year began. 

Because the tax cuts are supporting spending, businesses have been able to maintain sales or even grow them modestly.  At the same time they have been cutting hours worked and even the number of paychecks they issue in the United States.  The result is an explosion in productivity, but also a limit upon the spending capability of our economy. 

Is there a solution to this problem?  Yes, but it will not be easy.

The strength of the American economy has almost always included its ingenuity and flexibility.  When we were worrying about the hollowing of American enterprise in the 1980s (and we worried as much then as now), we began creating new industries with new job qualifications.  We also beefed up the effectiveness of our existing industrial materials industries and fabricators.

The jobs that were lost then did not come back, but new jobs sprang up.  As recently as 2000, our unemployment rate was the envy of the industrial world. 

From 1990 through 1999, our exports grew almost three times as fast as our domestic economy.  Those countries that took our jobs in fibers and agricultural processing became markets for our turbines, aircraft, and computer programs. 

Japan appears to be learning the lessons we taught with our performance in the past decade.  In the first seven months of this year, they have exported more goods and services to China than they did in the previous entire year.  By contrast, our exports to Asia have lagged.  Indeed, we are selling 5 percent fewer exports to the world today than we did in 2000.

Caesar commanded his troops to seize the day.  American enterprise must begin to seize the new opportunities.



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