WASHINGTON - Regarding the economy, this is a time - like, cometo think about it, all other times, regarding everything - toremember this: "There are knowns, known unknowns, and unknownunknowns." That axiom (whose author is unknown) is pertinent to theproblem of understanding the economy's trajectory, or at least notmisunderstanding it too harmfully.
America has just been draped with the journalistic equivalent ofblack crepe - stories about the dreadful Christmas shopping season.But the season, although disappointing when measured againstexpectations, was slightly better than last year's, which was thebest Christmas in a decade.
Amid anxiety about a coming recession, unemployment has crept upone-tenth of 1 percent to ... 4 percent, a full percentage pointbelow 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 regretevidence that the economy is on a glide path to 2.5 percent to 3.5percent growth next year.
And for the president-elect, the slowdown is serendipitous, givenhis advocacy of an across-the-board tax cut.
He can now advocate the cut as a stimulative, countercyclicalmeasure 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 partialprivatization of Social Security. Critics will ask: Will thegovernment-approved funds in which individuals will invest portionsof their Social Security taxes be more secure investments than, say,AT&T?
Once synonymous with blue chip reliability, AT&T's stock hasplunged from $61 to $17 (as of Wednesday) in nine months. LucentTechnologies, the once-mighty equipment firm spun off from AT&T, hasissued five profit warnings this year.
Peter Goodman of The Washington Post says that this year themarket erased $380 billion of worth from Lucent and AT&Tshareholders.
The broadening demographics of stock ownership, which nowincludes more than half of all households, is desirable, not leastbecause it broadens the constituency for policies of economicprudence and growth. Yet as participation in the stock marketincreases, so does the potential for economically destabilizing moodswings in the public.
That is, some analysts, including Alan Greenspan, believe thereis a "wealth effect" - that consumption increases as risingportfolio values cause consumers to feel more prosperous on paper,thereby producing irrational exuberance among consumers. It isirrational if based on the assumption that paper wealth ispermanent.
Greenspan's formula is that every extra dollar of stock marketwealth prompts a 3- to 5-cent increase in consumption. And it wouldseem to follow that in a society of broad stock ownership, there canbe a negative wealth effect - declining portfolio values causemutually reinforcing retrenchments that drive the economy downfurther and faster than underlying realities warrant.
However, Kevin Hassett, resident scholar at the AmericanEnterprise Institute, notes that individuals who are at leastmoderately wealthy own most stocks: "The top 1 percent of equityowners hold about 50 percent of all corporate stock. The top 5percent own about 80 percent of all stock."
But these individuals account for a small share - perhaps aslittle as 12 percent - of society's aggregate consumption.Therefore, Hassett says, it is mathematically implausible to arguethat positive wealth effect drove the economy to its heights.Whether a negative wealth effect can of itself cause a downwardcascade of effects that result in a recession is a known unknown.
In October, Nokia, the Finnish telecommunications firm, estimatedthat 400 million cell phones would be sold in 2000, that "in theregion of 550 million" more would be sold in 2001, and that sometimeduring 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 rockedby the implosion of the dot-com sector, is now running short ofelectricity. This is because of badly administered and half-heartedderegulation, and badly underestimated demand for electricity. Theeffects of California's woes on the national economy are as yetunknown.
The known unknowns are less worrisome than the unknown sort. But,then, 20 years ago the Internet was an unknown unknown.
Will writes for Newsweek.
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