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Economy Still Going Strong

The Journal Editorial Report

Paul Gigot: This week on "The Journal Editorial Report," a wild ride on Wall Street as stocks suffer their biggest one-day drop in years. Was the sell-off merely a routine correction or a sign of recession ahead? We'll tell you why this is not the time to panic. And Democrats pay their union dues. The House passes a bill that allows Big Labor to organize workers without giving them access to a secret ballot vote.

We'll have the details after these headlines.

Gigot: Welcome to "The Journal Editorial Report." I'm Paul Gigot.

U.S. stocks suffered their biggest one-day drop in years Tuesday, after concerns about China and slower-than-expected growth here at home triggered a dramatic sell-off. Was it merely a market correction or a sign of recession ahead?

Here to put it all in perspective is Brian Wesbury, the chief economist for First Trust Advisors. Brian, welcome back to the program. Great to have you here.

Wesbury: It's great to be with you, Paul.

Gigot: So, Alan Greenspan, the main they used to call "The Maestro" as chairman of the Federal Reserve, used the R-word, "recession," this week, said it's possible by the end of the year. Do you agree with him?

Wesbury: No, I don't. Well, let's put it this way. There's always the chance of a recession. There's a mistake that somebody could make. Ben Bernanke could make a mistake; the Congress could make a mistake and raise taxes too much and throw us into recession. But if those kinds of mistakes don't happen, I think the odds of a recession today are very, very low.

Gigot: Well, let's talk about some of these indicators. You've got durable goods were down. You got housing starts were down. You have profits beginning to slow a bit. You have some jittery signs in world stock markets.

Wesbury: Right.

Gigot: What are the reasons you're more optimistic?

Wesbury: Yeah, I think there's really three main reasons that I'm optimistic about the economy. One's a real long-term one, and that is ever since the early 1980s, when we reformed the tax code and deregulated, we've had a huge surge in technology in the United States. This has boosted productivity, and this huge boost in productivity is lifting our economy. It has for 25 years. I think it will for the next 25 years.

The second reason is the tax rates are still very low. The tax cut of 2003 is still in place. There is a chance we might have a few small tax hikes at the edges this year, but nothing major.

And then the third reason is that I believe the Federal Reserve has not tightened too much. The way I put it is the Fed's not tight. They're just less loose. And when you put all of that together--strong productivity, low taxes and a pretty easy Fed--I think the economy is in great shape.

Gigot: But Brian, we've had this period of a housing slump, and you are seeing problems in the credit markets, particularly related to housing in the subprime loan market, but it's beginning to go up the food chain a little bit. Countrywide Financial announced that its longer-than-30-day loans are creeping up. How worried are you about this infection in the credit markets creating some problems?

Wesbury: Well, right now the real issues are located in what we call the subprime market, that high-interest-rate, relatively small area when you compare it to all mortgages. And even the defaults there are leaving returns this that marketplace still about market average. And that's what the whole process is all about: We charge a higher rate, expecting more defaults, and when you net it all out, the returns should be about equal to other marketplaces. And so at least right now, I don't think that's spreading. And I think the worst is probably over in the housing market. It's not that we're going to get better very quickly. It's just that we are not going to decline as rapidly. And I think we'll probably even see some stabilization.

Gigot: Well, you said the Fed has not been tight so far. I agree with you. But you're looking at--if some of the inflation numbers that I look at, the core inflation rate has been above what the Fed's target of 2% is for 34 straight months. How long can that last? And do they have to tighten further?

Wesbury: Right. I think the Fed does have to tighten further. That was one of the other pieces of news we had over this past week, and that is that the core PCE, the core consumption deflator--

Gigot: That's without food and without energy?

Wesbury: That's right. And it's the Fed's favorite measure, because it weights things a little bit differently than the consumer price index. The core rose 0.3%. And it's up 2.3% in the past year. Now, both of those are pretty small numbers but that puts the inflation rate above Bernanke's comfort zone of 1% to 2%. And as you have pointed out, it's been there for a long time.

They keep expecting a slow economy to pull inflation back down. And as we learned over history, a slow economy doesn't slow inflation. The only thing that slows inflation is tighter money. I still think the Fed is going to have to hike interest rates a couple of times this year.

Gigot: All right, Brian, briefly, what's your forecast for the year in GDP and in jobless rate? Are we going to get above 4.6%, our current unemployment rate?

Wesbury: I don't think so. I think the unemployment rate will come back down. One of the other overlooked pieces of news over this past week was that the consumption numbers came in very strong for January. Car sales held in there in February. Looks like we're going to have 3% real growth in consumption in the first quarter. My forecast is that we are between 3% and 3.5% real growth this year, that inflation will continue to creep higher, that the Fed will have to tighten.

And by the way, Paul, I think the stock market was undervalued to begin the day on Tuesday before its big decline, and it's even more undervalued today.

Gigot: All right. Well, on that note of optimism, Brian, thank you for being here.

Wesbury: Thank you, Paul.

Gigot: We'll have more on this week's market mayhem, as well as some positive news from manufacturing when we come back. Plus, Democrats pay their union dues. Speaker Pelosi hands Big Labor a big win this week with a bill that eliminates the secret ballot in organizing elections. Is this payback for labor's role in regaining the majority last November? Our panel weighs in when "The Journal Editorial Report" continues.

Gigot: We're back with more on the market plunge and what it means for the economy.

Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, as well as Jason Riley and Steve Moore, both Wall Street Journal editorial board members.

Dan, when the market falls 4% in one day, and has a rough week like it had this week, it means something. What do you think it means?

Henninger: Well, you know, a lot of the focus this week has been on Alan Greenspan and presumably him talking about a recession. You will recall, Paul, the editorial board had lunch with Alan Greenspan in early 2002. And the economy had been coming off this collapse in the stock market bubble at that time. And Greenspan said to us then, it is underappreciated how much resilience there is in the American economy now. And it is a result of the economic policies that were put in place by Ronald Reagan.

Now, I think that that strength in the economy is still there, that the real economy is strong: productivity, growth, wages. The problem now is in the financial markets. The question is, is there something going on in the financial markets right now that could even eventually spill over into the real economy?

Gigot: Let me ask you about that, Steve. We have a chart I want to show our viewers about the housing market, because we've had real reduction in housing starts and problems in the housing credit markets.

Every time we've had a housing recession, if you will, in this economy, it's really spread or been coincided with a larger recession. Why is this time going to be different, or will it be?

Moore: Well, I think people have to take a deep breath and relax a little bit here. I mean, this economy is in its 64th month of recovery. I just went over some of the statistics where we see real improvement. Corporate profits have been pretty good. Manufacturing is up. Inventories are down. Budget deficit down. Personal income up. Consumer spending up. So, you know, there are mixed signals in the economy right now. It's not all doom and gloom.

You're right. You've pointed to the one area of the economy that I'm worried about, too, is the housing market. I live in an area where in the last 10 years in Virginia our housing market has tripled in value virtually.

Gigot: Wow.

Moore: And now people aren't seeing the increases. And so I do worry about the people who have made these really low-down-payment loans on their homes. Because now they have an incentive with the market falling to walk away from the loans.

Riley: Yeah, and that's where a lot of the concern is, in the subprime lending area.

And to Dan's point about Alan Greenspan. It's interesting that Alan Greenspan's predecessor did not make a habit of--

Gigot: Paul Volcker.

Riley: Paul Volcker--did not make a habit of going around musing about recession dangers after he left office, which is something Mr. Greenspan might want to keep in mind in the future.

A lot of the worries about the subprime market and lending, too, for people with weak credit histories, basically--

Gigot: Right.

Riley: --and there have been an increase in late payments in that area of late. There's some worry. But Fed Chairman Bernanke testified this week to the House Budget Committee that he's not worried about that problem spilling over into the broader economy. And he shouldn't be. The underlying base of the economy is strong. There's low unemployment. There's job growth and wage growth, which means most borrowers are in a position to repay their loans.

Moore: And you know, Jason, there are a lot of exultant economists this week who predicted five of the last zero recessions. So these are people who have been wrong, wrong, wrong. And they're finally saying it is right around the corner.

I still think that the fundamentals are very strong on the economy. And in terms of investors in the U.S. stock market, where else are you going to invest now? China is a mess. That's spilled over into Asia.

Gigot: Steve, China is not a mess.

Moore: Well, I mean--

Gigot: It's still growing at 9% or 10% a year. The stock market--which has almost no relation to the real Chinese economy--fell.

Moore: Well, I just meant their stock market took a much bigger tumble than ours did.

Gigot: I want to press this one point about the Federal Reserve. Because it seems to me that's the real wild card here. They have had easy money for a long time. We've had an awful lot of what economists call liquidity out there, credit easy to get. Is it still too easy? And are they going to have to tighten further? And then we might see some real problems. That's the one thing that I really worry about, Dan.

Henninger: Well, I think that's right. And again, going back to the earlier point about Ronald Reagan's economic policies, monetary policy was one of the three legs, and Paul Volcker got monetary policy right. So if the Fed does its job, then that raises the question of whether Washington will do its job. I think that's where the real threat to the economy lies: in Congress, on tax policy and on regulatory policy. If the Democrats pull the trigger on some of the ideas that they have in mind to do, I think the economy is going to be under a lot of pressure.

Gigot: All right, Dan, last word.

We'll be back after this short break. Still to come, they helped Democrats regain the majority last November. And now Big Labor is getting a big payback with a bill that abolishes the secret ballot in union elections. We'll have the details when "The Journal Editorial Report" continues.

Gigot: Its payback time for Big Labor. Union chiefs helped put Democrats back in the majority last November, and this week Speaker Nancy Pelosi returned the favor, bringing the ironically named Employee Free Choice Act to the House floor for a vote. Under the bill, a company would no longer have the right to demand a secret-ballot election before a union could be certified, thus stripping 140 million American workers of the right to decide in private whether to organize.

Jason, the AFL-CIO and its president, John Sweeney, made this their No. 1 priority this Congress. Why is it so important to them?

Riley: Well, it's so important because their membership numbers are down. In the 1950s, private-sector workers were unionized at a 35% rate. That number is down to something just over 7% today.

Gigot: Wow.

Riley: And that explains why they want to ease the rules to organize. And it's a little disingenuous for the unions to come out and say that their numbers are down because management is using unfair labor practices to stop them from organizing. The fact of the matter is unions are having difficulty convincing workers that organizing is in their best interests. And it makes perfect sense when you look at the most heavily unionized industries right now and how they're doing. You know, U.S. automakers, in Detroit at least, the steel industry, the airlines--these are not industries that are doing well. They're shedding jobs, and they're losing money, so--

Moore: We should define for people what this is. I mean, basically it's saying no more secret elections, that the unions can come in--and let's face it, they have a pretty thuggish and intimidating past. And they want to basically go up to individual workers and say "Sign this card." So instead of having secret elections as now you have everywhere in the world, even China and Russia, they want it basically open so they can intimidate the people.

Gigot: But just to press this point, unions now have card-check ability, right?

Moore: Yeah.

Gigot: If you get 30%--if workers in a particular work site, 30% of them, sign a card, then the employer is either obliged to certify the union or to request an election, if the unions want it, correct?

Riley: Yes. That's absolutely right. Right now, card check is in place as an option. What the House passed yesterday, or this week, would make it mandatory.

Gigot: What percentage--

Moore: By the way, this isn't even--there is no way it's going to get through the Senate. There's no way that George Bush would sign it. So this is just a show of pure muscle by the unions.

Gigot: What percentage of those elections that are held now, do unions typically win, organizing elections?

Riley: Unions win a little more than half of the elections. But that number can be skewed because they only want to have an election if they have a good chance of winning it. So.

Gigot: Dan, explain that political puzzle that Steve raised for me. Why did Nancy Pelosi--why did labor make the Democrats, including a lot of these moderates, who won not on the labor agenda, why did they make them walk the plank?

Henninger: Well, the reality here, the truth is that labor and the Democratic Party are now inextricably joined at the hip politically. They absolutely need one another.

This bill passed yesterday on a straight party-line vote. Only two Democrats--

Gigot: Passed Thursday, I think.

Henninger: Thursday, that's right. It passed with only two Democrats voting against it. To win elections, the Democrats have to have labor supporting them. Twenty-five percent of households claim to have some labor affiliation, and in the November election, they were very important to giving Congress to the Democrats. So in 2008 and 2009, they want labor behind them, and so they're going to give them support on this bill.

Moore: The big question, though, Dan, is what about those 25 to 30 moderate, centrist Democrats in Republican districts? How do they explain this vote, Jason? I mean, it's indefensible. Really, it really truly is.

Riley: It is on both sides, both the business lobbyists and the union lobbyists. We're going to remember this vote.

Moore: Exactly.

Gigot: It gave the business--I mean, business disagrees on health care with one another. They disagree on welfare reform. They disagree on immigration. But on this one they were united, because they realized the competitive damage it could do in--

Moore: One last point about this. Pelosi was on a roll. She passed her first six pieces of legislation. I think the last couple of weeks have not been good. They overplayed their hand on Iraq, and I think they've overplayed their hand with the unions on this issue.

Gigot: Does this have any chance of passing, Steve?

Moore: Zero.

Gigot: Zero.

Moore: Zero.

Gigot: But what about in 2009? Does it have a chance of passing in 2009?

Moore: Oh yeah, you put the Democrats in every lever of power and it sure will pass.

Riley: And for those Republicans--and 13 Republicans voted for this thing. And in '09, if they're still around, somebody's going to remember that vote and bring it up.

Gigot: All right, Jason, thank you.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

Gigot: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, "Titanic" director James Cameron draws fire from Christian groups for his latest work of fiction. Dan?

Henninger: Yeah, the Hollywood director of "Titanic" and "The Terminator" is going to have a program on the Discovery Channel purporting to have discovered the tomb of Jesus in Jerusalem. Not only that, he says the tomb proves that Jesus married Mary Magdalene and had a baby. Now, poor Mary Magdalene, she keeps getting dragged into this stuff. Let the poor woman rest in peace.

Anyway, scholars in Israel say that the whole thing is bunk. The tomb was discovered in 1980. The names that are inside of it are common names at the time. And the problem is that the Discovery channel, by dignifying this pseudoscience, reduces everything to a kind of circus of superstition and skepticism.

You know, we can't even find out who fathered Anna Nicole's baby last year. Let's just forget about a tomb that's 2,000 years old. Close it, and have done with it.

Gigot: Is Indiana Jones starring in this?

Henninger: James Cameron is.

Gigot: All right.

Next, she spent eight years as first lady in a White House that enjoyed legendary support among black voters. But Hillary Clinton learned this week not to take that for granted in her own presidential bid. Jason?

Riley: Yes. It's interesting that there's been so much about, and foolish talk I think, about whether Obama is "black enough" to win black support. I think we got a reality check this week when some black leaders in New York came out and criticized Hillary for her attacks, her recent attacks, on Obama. And I think the real story here is whether Hillary will be able to go after Obama and hold on to her black supporters, some of which will circle the wagons if she gets a little too vicious.

Gigot: Well, she has the support of most of the black leaders in Congress, doesn't she?

Riley: Right now she does. But I think this is evidence. These are black political leaders. This was the lieutenant governor of New York and a minority leader in the Legislature who came out. So I don't know how tenuous that support is.

Gigot: All right, Jason.

Finally, Britain's Prince Charles is no fan of the Big Mac. Steve?

Moore: Yeah, talk about outrages. Prince Charles wants to create a black market in Big Macs in London. He basically made a statement this week that they should ban McDonald's so that they can fight obesity. And what's next, banning Dunkin' Donuts and Kentucky Fried Chicken? Especially, by the way, in a place like London, where you're just--I mean, let's face it, the British are not exactly known for their great cuisine. And you go to London, now you're gong to have to eat steak and kidney pie.

Every time I go to London--and I think Charles is going to lose on this because you're still going to be able to say "Supersize me!"

Gigot: All right, Steve.

That is it for this week's edition of "The Journal Editorial Report." Thanks to Dan Henninger, Jason Riley and Steve Moore. I'm Paul Gigot. Thanks to all of you for watching, and we hope to see all of you right here next week.


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