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Energy, Housing, China, Competitiveness – Bob Aliber’s Latest Economic Update

Saturday, March 26, 2011


Two major energy related shocks in the last month, first the political turmoil in Tunisia, then Egypt and their neighbors, and then the earthquake, the tsunami, and the disaster at the Fukushima Daiichi nuclear plant. “Going nuclear” had seemed one way to reduce dependence on fossil fuels. It is almost as if the chance pairing of these events had been staged by the proponents of renewable energy sources, although the surges in the prices of corn, grains, and foods suggests the limits on the reliance on corn-based ethanol.

The oil price has surged by twenty five percent, even though the supplies have not declined and demand has not increased. Japanese stocks declined by more than fifteen percent, and the yen has appreciated by three percent.

Markets seem fragile—a little news, a little no-news—and prices move by a very large amount.

For most of 2010 the U.S. economy was trapped in a Catch-22 situation. Corporate profits were exceptionally high despite the large output gap and firms were cash rich, but they were reluctant to expand their payrolls because households were sitting on their money. Families lacked the confidence to spend more because the economic recovery seemed fragile with a lot of chatter about a “double dip recession” and frightening newspaper headlines about the stubbornly high level of unemployment.

Still, the U.S. economy grew by three percent, which would be considered remarkable if the unemployment rate had not been north of nine percent.

Traditionally recoveries from recessions have been robust and resulted from surges in spending on real estate as credit became more readily available. By contrast the recovery from the 2008–2009 recession was tepid, despite very low interest rates, because of three factors. The overhang of unsold homes that were constructed in the bubble years and the hundreds of thousands of properties in foreclosure have meant that housing starts have been one million below the long-run trend value, which probably depressed the annual U.S. growth rate by nearly two percentage points. The damage to household balance sheets from the declines in real estate and stock prices led many households to become more cautious spenders. The drag of a massive U.S. trade deficit meant that a significant part of any increases in U.S. spending on manufactured goods created many jobs in China.

The excess supply of houses now is concentrated in Florida, Arizona, and Nevada; many properties are for sale at prices far below the cost of construction (which suggests that the land has a negative value but really means there are tens of thousands of desperate sellers). Vulture investors now are buying these properties in anticipation of price rebounds; in the meantime these houses are rented to families that have lost their homes to foreclosure. Housing starts will increase in response to the low interest rates and as population growth absorbs some of the excess supply. Household balance sheets have been repaired, and families are increasing their credit card debt.

The annual bilateral U.S. trade deficit with China is $260 billion—nearly two percent of U.S. GDP. If Americans spend $1 billion more on Chinese goods and $1 billion less on U.S.-produced goods, 15,000 individuals lose their jobs in U.S. manufacturing and total employment declines by many more thousands—and the lower levels of U.S. GDP would mean smaller U.S. tax revenues and larger U.S. fiscal deficits. If Americans spend more on imports from Vietnam and Indonesia and less on imports from China, the U.S. trade deficit and the U.S. fiscal deficit also would decline, since Vietnam and Indonesia would increase their imports as their exports increase on a one-for-one basis, whereas China increases its imports modestly as its exports increase.

One topic in these quarterly letters has been the expansion of asset price bubbles in the United States, Britain, and Iceland; most of these bubbles have involved surges in real estate prices. The increase in the flow of money from China to the United States that began around 2002 contributed to the sharp increase in the supply of credit that led to the bubble in U.S. real estate. This bubble began to implode when the flow of money to the United States declined at the beginning of 2007; during the next twelve months the impact of the reduction in housing starts on U.S. GDP was largely offset by the decline in the U.S. trade deficit.

Curiously, it seems like the real estate bubble in China accelerated in 2007 as the U.S. bubble was deflating. Investment in real estate in Shanghai, Beijing, and the other major cities in the last three years has been a major driver of economic growth.

Developments in China’s urban housing market are summarized in the next section of this letter. The story is primarily anecdotal because the data are unreliable. Then I discuss the U.S.-Chinese trade imbalance and President Hu’s visit to Washington; the key question involves American policies in response to the large trade imbalance that results from protectionism in China. The third section focuses on increases in U.S. competitiveness, the thrust of President Obama’s State of the Union message. The last section provides projections for the growth of the U.S. economy in 2011.


Yogi Berra’s remark that “it is so expensive no one can afford to live there” applies to Beijing, Shanghai, Shenzen, and about ten other cities in China. Some families spend 60 or 70 of their incomes on housing There is a bubble in the housing market in urban China, which is based on an exceedingly high a ratio of home prices to household income, several million unoccupied apartments that are held as investments, and rental rates of return in the range of one to two percent. Real estate has been one of the few investments with a positive real rate of return.

When I was in Beijing last March, a former student said he was the only person living in his new apartment building–the other apartments had been purchased as investments. I visited a real estate office in Beijing in November; the standard 100-square-meter two-bedroom, two-bathroom apartment cost the yuan equivalent of $600,000. The real estate agent said that the income of those buying this apartment was $20,000—and that they had “other income”. The ratio of house prices to household income was 30.

The standard feature of a bubble is that investors project future prices based on recent increases in prices. Until the mid-1990s, living accommodations in China were communally owned, either by governments or by the employers. Then households were gifted ownership of their apartments in exchange for a nominal payment. Household wealth increased immediately; individuals owned their apartments debt-free. The prices of these apartments were low relative to annual household incomes. These apartments could be traded. Some individuals inherited several apartments, which they sold; they used the cash to buy more expensive new apartments that were constructed by private developers and in some cases by local governments.

Migration from the countryside to the major cities has been massive in the last fifteen years, which has led to surges in the demand for homes—and for land that can be used for new construction. Apartment prices have increased much more rapidly than household incomes. The rapid increase in prices has led to large number of purchase as investments, which in turn has contributed to a higher rate of growth of GDP.

The major uncertainty is the how many apartments are owned as investments rather than as personal accommodations. China produces 10 million new living units a year—and most of these units are in the cities and provinces that have experienced the most rapid economic growth. Assume that urban China accounts for one-third of the population and produces two-thirds of the country’s GDP. Perhaps nine million of the new living units are produced in urban China. Many of the newly purchased apartments are owner-occupied, some on a full-time basis and others on a part-time basis. (Business people from various provinces want a base in Beijing for the days when they visit the government regulators, and individuals want apartments in areas with highly touted schools and near prestigious universities.) Some of these newly purchased apartments are rented. Many of the owners have concluded that it is not worthwhile to rent because buyers want “virgin apartments” and rentals depress future selling prices.

Perhaps one-quarter of the newly constructed units in each of the last three years have been acquired as investments. (This assumption seems conservative in terms of anecdotes like “I am the only one living in the building,” “The new buildings are mostly dark in the evening,” and estimates that “30 to 40 percent of the apartments are unoccupied.”) These assumptions lead to the conclusion that five million units are now owned as investments.

What is the end game for the property market? What will happen to prices, and what will happen to number of units constructed in each of the next several years?

One outcome is that prices stop increasing and stabilize at current levels. In the long run, house prices have to adjust to household incomes; it would take 10 or 20 years for household incomes to increase so there would be an equilibrium relationship between household incomes and house prices. This outcome seems very unlikely.

Another outcome is that house prices decline modestly, which will lead to a larger decline in production of new apartments than in the first scenario. Few households are likely to commit to buy apartments as long as prices are falling —which suggests the likelihood of this outcome is low.

A third outcome is that prices decline sharply. The demand for new apartments and hence construction will fall as the economy begins to digest the several million unoccupied apartments that had been acquired in anticipation that prices would increase and increase further. The GDP growth rate will decline sharply. Households will reduce their expenditures on durables, including autos. Property developers will go bankrupt. Unemployment will surge. The major Chinese banks will incur massive losses and will become wards of the government once again.

The Chinese government will respond to the economic slowdown with a big spending program. The likelihood is low that China will then achieve a growth rate of eight or ten percent in the post-recovery period. The basic problem is that Chinese households have very high savings rates—the plague is too much saving relative to profitable investment opportunities.


The press chatter surrounding President Hu’s visit to Washington in late January highlighted that China’s growth rate of ten percent for 30 years has been three to four times higher than the U.S. rate. Some observers are skeptical of the data and its year-to-year stability, but no matter: The changes in the landscape— roads, railroads, airports, the buildings constructed for the 2008 Olympics, and the traffic jams—are impressive.

Several polls suggest that Americans believe that China is more of an economic powerhouse than the United States. Some analysts have projected that China’s GDP will exceed U.S.GDP in 2019. Maybe, maybe not.

Economic growth in most developing countries has been constrained because of the shortage of foreign exchange; these countries encountered constraints in “growing their exports.” In contrast, Chinese exports have increased at a very rapid rate. Most of these exports have been arranged by Japanese, American, South Korean, Taiwanese, or European multinationals. In the early 1980s Deng Xiao Peng invited these foreign firms to come to China with the idea that they would fill their supply chains with goods produced by low-wage labor for foreign markets. Seventy to 80 percent of the value of Chinese exports involves embedded imports of high-value components; Chinese value added is about 20 to 30 percent. Most of the Chinese value added involves the contribution by unskilled labor—the metaphor is that the assembly lines in China consist of young ladies with soldering guns and lots of screwdrivers of different sizes.

Between 1980 and 2000, China’s imports increased about as rapidly as its exports. China’s trade surplus began to increase after 2000 as a result of the sharp increase in exports that followed from an effective decline in export prices as productivity in manufacturing surged.

Usually the surge in exports of a country leads to a nearly comparable increase in its imports, primarily because of the increase in household incomes that follows from the increase in exports. In the last ten years Chinese imports have increased less rapidly than exports because China’s tariffs and non-tariff barriers to imports are prohibitively high. State-owned enterprises are directed to buy from Chinese suppliers even though the prices of comparable foreign goods are lower than the prices of Chinese goods. One fascinating aspect of the bilateral trade between the United States and China is that the data suggest that the bureaucrats in Beijing manipulate trade arrangements so that China’s imports from the United States each year are 25 percent of U.S. imports from China.

China now produces more automobiles than the United States. GM sells more automobiles in China than in the United States; Buick is a best-seller in China. The Buicks made in Shanghai are not identical to those produced in Michigan—my bet is that on a quality-adjusted basis, the price of the US-made Buick would be lower in Shanghai than the price of a Shanghai-made Buick after adjustment for subsidies that reduce production costs in China.

The second factor that explains why China has developed a massive trade surplus is that the Peoples Bank of China purchases US dollars from exporters to limit what otherwise would have been a significant appreciation of the yuan. If the Chinese government had not bought US dollars, the appreciation of the yuan would have been large because the extensive import protection means that purchases of foreign goods would not have increased significantly in response to the effective declines in their prices in terms of yuan.

Obviously the goods that the United States imports from China cost less than comparable goods produced in the United States. U.S. value added per worker in manufacturing is $80,000—value added per worker in export industries might be $100,000, while value added per worker in the industries that produce import-competing goods might be $60,000. (The $80,000 is a hard number, the other two are guesses.) The implication is that each increase of $1 million in U.S. imports means a loss of 16 jobs in domestic manufacturing; each increase of $1 billion in imports from China leads to a decline in 16,000 jobs in U.S. manufacturing. And an increase of $250 billion in imports means a loss of four million jobs in U.S. manufacturing—a ballpark estimate but a dramatic indicator of the costs to America of the Middle Kingdom’s protectionist policies.

The rhetoric in Beijing is that China’s purchases of U.S. Treasury securities finance the U.S. trade deficit and that the U.S. economy would be in a desperate situation if China were to stop buying U.S. Treasury securities. But as they say in the Vermont hills, this statement is ass backwards—if the Chinese weren’t buying $250 billion in U.S. Treasury securities each year, the U.S. trade deficit would be $250 billion smaller, and several million more individuals would be at work in U.S. manufacturing. Moreover, the U.S. fiscal deficit would be smaller by several hundred billion dollars because U.S. tax revenues would be higher.

The likelihood is low that there can be significant reductions in both U.S. unemployment and the U.S. fiscal deficit as long as the bilateral trade imbalance remains about $250 billion.

The conundrum is that even though China’s prosperity is dependent on the ready access of its goods to the U.S. market, the Obama administration appears like the supplicant in its negotiations to reduce the trade imbalance. During President Hu’s visit to Washington, the Obama administration stated that China would buy $46 billion more of U.S. goods, including jet aircraft, over the next five or six years—say an increase of $10 billion of sales in each of the next five years, or a reduction of the trade imbalance by four percent. Was this a joke?

Both the Bush administration and the Obama administration have confused targets and instruments in demands on China. The objective—the target—of U.S. policy should be to secure an agreement with China on an orderly reduction in the trade imbalance. A revaluation of the Chinese yuan is one instrument; another is a reduction in Chinese import tariffs; a third is a directive that state-owned enterprises buy from foreign sources; and a fourth is a reduction in non-tariff barriers. The U.S. government’s insistence that the yuan be revalued incurs the massive risk that the reduction in the trade imbalance from an appreciation of ten, 20, or 30 percent will be small or modest.

The likelihood that the Chinese now will revalue the yuan after three or four years of badgering, hectoring, threatening, cajoling, etc., seems small.

What is the “end game” for this bilateral imbalance? Some in the Beijing government— and many members of the Chinese public—must view the large and persistent trade surplus and the accumulation of massive international reserve assets as a sign of their country’s growing economic might.

A standard assumption in international economics is that the small countries adjust to payments imbalances, either because they run out of money to finance their deficits or because their persistent surpluses lead to inflation. China is a very large small country. Its efforts to suppress the inflationary impacts of its large trade surpluses have not been fully successful; the reported inflation rate is five percent, although some economists and many taxi drivers believe that the “true” inflation rate is higher—much higher—especially in the major urban centers. One scenario is that market forces lead to a significant reduction in the trade imbalance, which might occur in response to food shortages in China or to an increase in prices and costs and a decline in Chinese competitiveness. Many of the multinationals that helped China achieve a phenomenal growth in its exports are shifting to Bangladesh, Vietnam, and Indonesia because their costs are lower.

A second scenario is that the bilateral Chinese trade surplus with the United States increases in response to continued productivity gains in China as the firms move up the value-added chain, and produce more of the high-value components that they now import.

A third scenario is that the bubble in residential real estate in urban China implodes, and that the Chinese trade surplus with the United States surges in response to a marked slowdown in the country’s growth rate.

If the bilateral trade imbalance increases because of either the second or the third scenario, then at some stage the Obama administration—or the next U.S. administration— might say, “No more. Enough is enough.”

The most valuable “asset” that the United States has to correct the imbalance is that it can manage the terms of access to the American market—much as the Chinese manage the access of foreign goods to their market. The Obama administration should make it clear beyond the shadow of a doubt that if the bilateral trade imbalance does not decline by $75 billion a year, the U.S. Treasury will impose a uniform tariff on Chinese value-added on imports. Initially the tariff rate will be ten percent; if that fails to reduce the imbalance significantly, the rate will be raised to 20 percent, and then to 30 percent.

The Chinese will bluster about American protectionism, but these statements can’t be taken seriously when Chinese exports to the United States are four times larger than Chinese imports from the United States.


The lead article in the March 14th edition of Time by Fareed Zakaria was titled, “Yes, America Is In Decline”. The response by David Von Drehle was titled “No, America is Still No. l.” Both are right, since Zakaria focuses on the rate of change while Von Drehle highlights the level. In the long run, the continuation of the decline would mean that America eventually would no longer be No. 1. But which country would replace America as No. 1, much as the United States displaced Britain in the last several decades of the nineteenth century and as Britain had displaced the Netherlands more than a century earlier?

The twin to the question of whether the United States can remain No. 1 is whether some other currency will challenge the U.S. dollar as the dominant reserve currency. France and China are concerned with the “Exorbitant Privilege” (a term used by General de Gaulle in the 1960s) that is supposed to accrue to the United States because foreign central banks have chosen to hold most of their international reserve assets in the form of U.S. dollar securities. These central banks have been “voting with their feet”; they had a large number of choices and concluded that dollar securities offered a more attractive package of risk and return than securities denominated in the Euro, or the Japanese yen, or the whatever. The Chinese have a lot of chutzpah when they complain that foreign holdings of dollars are too large even though they and their satellites are the largest holders.

The foreign challenge to what had been the dominant U.S. global economic position in the 20th century is illustrated by the Andy Warhol theory of economy growth, which highlights that every country grows rapidly for 15 or 20 years; then some other country advances to the leading position on the growth-rate hit parade. Countries grow rapidly in a sequential fashion; Britain was in front for four decades, and then the United States and Germany advanced to the top position. Japan had an exceptionally high growth rate between 1950 and 1990. The pattern is that countries that can grow their exports at a rapid rate can achieve high rates of economic growth. But the ability of a country to be at the top of the hit parade for several decades in terms of the rate of growth of exports is no assurance that the country will advance to the No. 1 GDP position.

In the 1980s the rate of economic growth in Japan was twice that in the United States. The Japanese had all the money; seven of the ten largest banks in the world were headquartered in Tokyo or Osaka. The Japanese bought lots of trophy buildings, including Rockefeller Center in New York City and the Pebble Beach Golf Course in California; they bought ten thousand items of French art. Then the bubble in real estate and stocks burst, and Japan slid into the economic doldrums, despite its advantages of a high savings rate and a low cost of capital, and a very large number of highly innovative firms.

The metaphor from bicycle races is illustrative; more energy is required to be in the lead because of the greater wind resistance. No country that has been No. 1 has been able to grow at more than four or five percent a year. Japan, China, South Korea et al have been able to achieve much higher growth rates because they have been playing “Catch up”; they rent, borrow, or steal technologies developed by the leaders, and then produce at lower cost because of their wage rate advantage, which enables them to increase market share in countries that had developed earlier and have higher costs. Japan grew rapidly from the 1950s to the early 1990s, but then its growth rate slowed significantly when its per capita income increased to about eighty percent of the U.S. per capita income. Japan has many world class firms, but its aging demographics mean that its growth rate will lag the U.S. rate. There are marvelous centers of industrial excellence in the European Union, but the populations in virtually all of the member countries are aging at a faster rate than the US population.

Several polls at the time of President Hu’s visit to Washington indicated that Americans believe China was more of an economic powerhouse than the United States. And the chatter is that China’s GDP will be larger than US GDP in 2019—or 2020. Maybe—but unlikely…

There are two groups of companies in China, the foreign multinationals and the domestic firms, which are often state-owned-enterprises. One impact of this distinction is that despite the surge in Chinese exports, it is difficult to identify a Chinese firm that is globally competitive and in the same league as a Samsung or a Lucky or a Hundyai. As per capita incomes and hourly wages in China increase, the feckless multinationals will shift to Indonesia, Bangladesh, and Vietnam as lower cost sources of supply.

President Obama’s State of the Union message highlighted the need to increase American competitiveness—the slogan “Win the Future” is compelling. But we’ve seen the competitiveness movie before; about every 20 years a new administration develops a program to enhance American competitiveness because the economy appears challenged by a country that is increasing its exports at a very rapid rate. the . Perhaps it will be different this time. Jeffrey Immelt of GE has been appointed to chair the Commission on Jobs and Competitiveness. One rationale for this commission is that America is falling behind in research and development spending, patents, and technological leadership. The infrastructure of roads and bridges and railroads is creaking and leads to higher business costs. Another rationale is that the commitment to competitiveness will enable the Obama administration to increase government spending on education, research, and infrastructure—although some skeptics will say that the only way to achieve agreement on more government spending when the deficits are exceptionally large is to wrap the proposal in the competitiveness ribbon.

How is competitiveness measured, and why are some countries more competitive than others? One measure of competitiveness is the cost of producing the same good in different countries. A more comprehensive measure is a country’s trade balance; countries with trade surpluses are competitive, and those with deficits are not. By this measure China is extremely competitive, while the United States is not.

Why are some countries more competitive than others? Low wage rates contribute to competitiveness, but many countries with low wages are not competitive. Competitiveness involves the relationship between wage rates and productivity, and the value of the currency. Taxes and regulations increase costs and dampen competitiveness. China is competitive—at least as measured by its large trade surplus—because of the package of its low wages, government subsidies to industry, tariffs and other import barriers, and currency market intervention practices.

U.S. competitiveness can be enhanced by eliminating various government policies that impede economic growth by dampening productivity. The United States may or may not need an energy policy—but the U.S. ethanol policy that requires that gasoline be blended with ethanol is stupid, since the BTU required to produce one gallon of ethanol is about equal to the BTU of the same gallon. (U.S. ethanol policy is a “tax” on food since the supply of grain available for food is reduced without adding significantly to the energy supply.) The U.S. tax system needs to be rationalized; the corporate income tax is a very uneven sales tax in drag and penalizes the efficient firms, since they pay higher taxes than their less efficient competitors in the same industries. The inefficiencies of the personal income tax are evident from the large number of accountants who make their living processing information for 1040 forms—it’s as if the U.S. Congress had legislated a full employment act for accountants.

One widely held view is that the tax system in each country handicaps domestic producers relative to foreign producers. The U.S. corporate tax rate is 36 percent—39 percent if corporate income taxes of various states are added to the federal tax. If the corporate income tax—which now generates $400 billion of annual revenues—were completely eliminated, competitive forces would lead most firms to reduce their selling prices. Lower selling prices would enable these firms to become more competitive in foreign markets and in the domestic market. U.S. exports would tend to increase relative to U.S. imports, and foreign currencies would tend to depreciate. Some U.S. firms would find that the depreciation of foreign currencies would be larger than the decline in their selling prices. (Hanover has a “dog tax” but the clever dogs in this college town have been able to shift the tax to their owners—similarly firms have shifted the burden of the corporate tax to their customers in the form of higher selling prices. We would all be much better off if the corporate tax were eliminated and a tax on value added or consumption adopted to generate the needed revenues.)

Assume that the Immelt Commission is brilliantly successful in identifying measures that will enhance U.S. productivity and in convincing the U.S. Congress to adopt its proposals. US productivity will increase; the potential U.S. growth rate will be higher. What will happen to the U.S. trade deficit?

Not much, because the U.S. trade deficit is determined by the desire of the Chinese, the South Koreans, the Singaporeans, the Malaysians to maintain undervalued currencies.

The challenge to the U.S. international competitive position comes from a dysfunctional set of international financial arrangements. When the Bretton Woods system was discarded, one view was that countries would permit their currencies to float. Some have, but many especially in Asia have not; these mercantilists have maintained currencies that are undervalued or greatly undervalued. The changes in ethanol and energy policy, as well as corporate tax and other areas, are attractive and will enhance U.S. productivity and the growth rate, but these changes will not make a significant impact on the U.S. trade deficit as long as international monetary arrangements remain dysfunctional.


The U.S. recession that began in January 2008 ended on the fourth of July 2009. The U.S. economy has been in the recovery mode for the last 20 months; real GDP is now higher than the pre-recession peak at the end of 2007. Because of the sharp increases in productivity, employment in the private sector is seven million below the level of the previous peak. (The decline in new home construction from two million to 600,000 has led to loss of three million construction jobs—plus thousands of jobs in production of refrigerators, window treatment, landscaping, etc.)

The good news is that there has been an exceptional increase in productivity. Some of the productivity gains involve higher wages, but most have led to higher profits.

The economy is now in expansion mode. Corporate America is hiring. The number of those at work increased by 200,000 in February—and most of the hires were in the private sector. New claims for unemployment compensation payments have declined in three of the last four weeks. Household spending in the fourth quarter was at an exceptionally high rate relative to household income, which means that they are able and willing to borrow and spend. The increase in household spending in the last several months of 2010 led to a decline in business inventories; firms now must re-build inventories, which could add $50 billion to $100 billion to the 2011 GDP.

“Manufacturing unexpectedly accelerated in January at the fastest pace in more than six years.” The Philadelphia Federal Reserve’s index of manufacturing activity “rose to 35.9 in February from 19.3 a month earlier and is at its highest level since 2004.” Auto sales are up, perhaps by 15 to 20 percent. Ford has indicated that it is adding a third shift in its manufacturing plants.

The Washington news in the last several months has been encouraging. Bill Daley’s appointment as White House chief of staff means that there is a pragmatist close to the president who is interested in getting things done. President Obama’s op-ed in the Wall Street Journal about regulation suggests that the White House will begin to think about the costs of regulation. (New EPA regulations regarding the procedures to be followed when working around lead paint in pre-1978 structures seemed so onerous that one of our local carpenters has taken early retirement.) The appointment of Jeffrey Immelt as head of the commission on competitiveness and jobs reflects a much more pro-business view than was evident before. One of the surprise guests at the dinner for President Hu was Goldman Sachs chair Lloyd Blankfein—out of the doghouse into the White House. President Obama’s speech to the U.S. Chamber of Commerce was very conciliatory.

My bet is that the growth rate from the fourth quarter of 2010 to the fourth quarter of 2011 will be in the range of 4.5 to 5.0 percent. This growth rate isn’t in the current data, but reflects the view that optimism and confidence will be self-reinforcing. A five percent growth rate will mean two million more people will be employed, and the unemployment rate would then be bouncing around seven percent.

One of the unknowns is the impact of the political turmoil in North Africa and the Persian Gulf on oil supplies and the oil prices. The oil price is up by twenty five to thirty percent, neither because of increases in demand nor because of reductions in supply, but presumably because of precautionary purchases. The increase in price from $75 to $100 a barrel amounts to a bit more than $100 a year for those who drive ten thousand miles a year.

A second unknown is the impact of the tsunami in Japan and the problems in the nuclear reactors on economic growth in Japan and in its trading partners. The three prefectures on the northeastern coast that were directly affected by the massive tidal wave account for two percent of Japan’s GDP and a modestly smaller amount of its wealth. The clean up of the debris fields will be expensive. Several tens of thousands of new housing units must be built, and the infrastructure of roads and railroads and power lines must be repaired. Japan’s economic growth rate will increased significantly.

The second aspect is that there will be more attention to increasing the safety of older nuclear electric generators, both in Japan and in the United States and Europe

A third unknown is the implosion of the bubble in the housing market in China. The good news from what appears inevitable is that the sharp decline in the Chinese imports of basic commodities would lead to a significant decline in commodity prices and in the price of gold. The bad news is that the Chinese trade surplus would surge, especially its trade surplus with the United States, as Chinese manufacturers increase their exports to offset the slowdown in the growth of domestic sales.